1Product Development EconomicsProf. Steven D. EppingerMIT Sloan School of ManagementPlanningProduct Development ProcessConceptDevelopmentSystem-LevelDesignDetailDesignTesting andRefinementProductionRamp-Up• Go/No-Go Decision Gates• Sensitivity and Trade-off Analysis2Product Development Economics Example:Polaroid Color Photo PrinterProduct Development Cash FlowCumulative CashInflow or Outflow ($)TimeInvestmentInvestment (–)Sales RevenueOperating ProfitOperating CostsBreak EvenTimePaybackTimeDevelopmentTime3Project Financial Analysis(also Business Case Analysis or Product Economics)• Most common method is net present value(NPV) analysis of project cash flows.• Alternative method is return on investment(ROI) analysis of cash flows.• Base case model computes nominal NPV.• Sensitivity and trade-off analysis supportsdevelopment decisions.• Qualitative factors also influence decisions.• Financial analysis is conducted at multiplepoints in the product development process.Net Present ValueNPV =period cash flow(1 + discount rate)periodperiodsΣNPV =C(1 + r)iΣNii = 14Inputs for NPV 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 rateExample: Stanley Hammer• Designed in 1995 byProduct Genesis forStanley Tools• Contractor GradeTM• Graphite compositeshaft core with over-molded jacket• Soft rubber grip5Inputs for Hammer 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$120k, 9 months$100k, 1 year$200k, 6 months$50k, 3 months$250k + $80k/year for 2 years200k units/year, 5 years (actually not flat)$4/unit + $2/unit overhead$12/unit
View Full Document
Unlocking...