mse 415 product design lecture 14 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
MSE-415: Product Design Lecture #14 PowerPoint Presentation
Download Presentation
MSE-415: Product Design Lecture #14

Loading in 2 Seconds...

play fullscreen
1 / 19

MSE-415: Product Design Lecture #14 - PowerPoint PPT Presentation


  • 105 Views
  • Uploaded on

MSE-415: Product Design Lecture #14. Chapter 15 Product Development Economics. Lecture Objectives:. Discuss Product Development Economics. Product Development Economics.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'MSE-415: Product Design Lecture #14' - cody-mcfarland


An Image/Link below is provided (as is) to download presentation

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.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
mse 415 product design lecture 14
MSE-415: Product DesignLecture #14

Chapter 15

Product Development Economics

lecture objectives
Lecture Objectives:
  • Discuss Product Development Economics
product development economics
Product Development Economics
  • A product is economically viable if the value in the market is greater than the cost by a designated margin justifies the investment required to produce the product.
  • Cash Inflows
    • Revenue from the product sale
  • Cash Outflows
    • One-time development cost (engineering)
    • Production cost (labor, equipment, etc.)
    • Marketing
    • On-going production cost (raw material, maintenance, etc.)
    • Support cost
product development cash flow

Sales Revenue

Operating Costs

Operating Profit

Net Profit

Break EvenTime

DevelopmentTime

PaybackTime

Investment

Product Development Cash Flow

+

$’s

-

Time

inputs for economic analysis
Inputs for Economic Analysis
  • Initial Expenses
    • Development cost and timing
    • Testing cost and timing
    • Tooling investment and timing
    • Ramp-up cost and timing
    • Marketing and support cost and timing
  • Ongoing Expenses
    • Marketing cost and timing
    • Product support cost and timing
    • Unit production cost
    • Displaced product revenue
  • Ongoing Income
    • Unit revenue
    • Sales volume and lifetime
  • Discount rate
    • Cost of acquiring money in the company
what is money worth
What is money worth?
  • You give me $50 this year and I will give it back in a year?
    • No interest
  • You give me $50 this year and I will give you $53 next year?
    • Accrued interest
  • You give me $47 this year and I will give you $50 next year?
    • Discounted interest
net present value
Net Present Value

S

period cash flow

NPV =

period

(1 + discount rate)

periods

N

C

S

i

NPV =

i

(1 + r)

i = 1

net present value example
Net Present Value Example

N

C

S

i

NPV =

i

(1 + r)

i = 1

  • 100 Dollars per year for the next 5 years
  • 6% interest (discount rate)

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

example
Example

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:

example answer
Example (Answer)
    • T=0 -$100,000 / 1.100 = -$100,000 PV.
    • T=1 ($30,000 - $5,000) / 1.101 = $22,727 PV.
    • T=2 ($30,000 - $5,000) / 1.102 = $20,661 PV.
    • T=3 ($30,000 - $5,000) / 1.103 = $18,783 PV.
    • T=4 ($30,000 - $5,000) / 1.104 = $17,075 PV.
    • T=5 ($30,000 - $5,000) / 1.105 = $15,523 PV.
    • T=6 ($30,000 - $5,000) / 1.106 = $14,112 PV.
  • The sum of all these present values is the net present value, which equals $8,881. Since the NPV is greater than zero, the corporation should invest in the project.
project financial analysis
Project Financial Analysis
  • Most companies use NPV analysis of project cash flows.
  • First, compute base model NPV projection.
  • Sensitivity and trade-off analysis supports development decisions.
  • Qualitative factors also influence decisions.
qualitative factors
Qualitative Factors
  • Project technology has application to other future projects
  • Competition
  • Keep product line current
  • Comprehensive product line
  • Social Trends
  • Support or auxiliary products
  • Potential breakthrough technology
  • Government trends
  • The boss likes it
  • etc.
what is money worth1
What is money worth?
  • Bank Interest 5-6%
  • Corporate Earning Rate 10-12%
  • Marginal Rate for new projects 10-18%
    • Why would Marginal rate be higher?
    • Risk of new development
    • Other opportunities for use of funds.
pda high capacity disk drive
PDA High Capacity Disk Drive

Should we develop a new PDA attachment?

quick calculation
Quick calculation

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.

But………

What did we leave out?

  • Marketing expenses of $ 250K + $80K per year
  • Time value of money
inputs for new disk drive base case
Inputs for New Disk Drive Base Case
  • Development cost and timing
  • Testing cost and timing
  • Tooling investment and timing
  • Ramp-up cost and timing
  • Marketing and support cost and timing
  • Sales volume and lifetime
  • Unit production cost
  • Unit revenue
  • Discount rate

$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

$56/unit wholesale

10%/year

what to remember
What to Remember
  • Financial analysis is driving product development decisions
  • Be supportive of ridiculously early requests for development costs, intervals, product costs, etc.
  • Economics can help drive your design decisions
    • Product development time versus product cost
    • Custom development, tooling, test fixtures versus product cost
next week presentations may 17 2007
Next WeekPresentationsMay 17, 2007
  • Presentation – 100 Points
    • (30 minutes max)
    • Remember you are promoting your invention to venture capitalists who have money to invest in your idea. Think about:
      • How complete is your product development process?
      • How much money do you need, and why?
      • What is unique about your invention?
      • How is your invention better than the competition?
      • Why should I invest in you invention?
        • Cost to manufacture
        • Profitability
        • Development cost
  • Homework – Ex. 2 & 3, p. 325