MSE-415: Product Design Lecture #14. Chapter 15 Product Development Economics. Lecture Objectives:. Discuss Product Development Economics. Product Development Economics.
Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.
Product Development Economics
period cash flow
(1 + discount rate)
(1 + r)
i = 1
(1 + r)
i = 1
NPV = 100/(1.06) + 100/(1.06)2 + 100/(1.06)3 + 100/(1.06)4 + 100/(1.06)5
NPV = 100/1.06 + 100/1.12 + 100/1.19 + 100/1.26 + 100/1.34
NPV = $421.24
X corporation must decide whether to introduce a new product line. The new product will have startup costs, operational costs, and incoming cash flows over six years. This project will have an immediate (t=0) cash outflow of $100,000 (which might include machinery, and employee training costs). Other cash outflows for years 1-6 are expected to be $5,000 per year. Cash inflows are expected to be $30,000 per year for years 1-6. All cash flows are after-tax, and there are no cash flows expected after year 6. The required rate of return is 10%. The present value (PV) can be calculated for each year:
Should we develop a new PDA attachment?
500,000 units at $56/unit = $28,000,000
Cost of 500,000 units at $46/unit = $23,000,000
Gross profit $5,000,000
Invest $2.6M to make $5M -- sounds good to me.
What did we leave out?
$1.8million, 18 months
$400K, 1 year
$250k, 6 months
$150k, 6 months
$250k + $80k/year for product life
200k units/year, lifespan 2.5 years= 500k units
$44/unit + $2/unit overhead