1. Economic Analysis for Product Development (Ulrich and Eppinger)
Build a base-case financial model
Perform a sensitivity analysis
Use sensitivity analysis to understand project trade-offs
Consider the influence of qualitative factors on project success

3. Step 1: Build a Base-Case Model

4. Step 1: Build a Base-Case Model

5. Using Excel for Q4 of Year 1:
Present Value of Year 3 Costs:
(-2250)/(1+0.10/4)^3= -$2089
Future Value
Annual interest divided by number of periods per year
Payments Made Each Period
Number of periods

7. Step 2: Perform Sensitivity Analysis
(e.g. 20% decrease in development costs)

8. Step 2: Perform Sensitivity Analysis
(e.g. 25% increase in development time)

9. Step 2: Perform Sensitivity Analysis
Ulrich & Eppinger, “Product Design and Development”

10. Step 3: Use Sensitivity Analysis to Understand Project Trade-offs

11. Step 3: Use Sensitivity Analysis to Understand Project Trade-offs (estimate Trade-off Rules from sensitivity analyses)
Ulrich & Eppinger, “Product Design and Development”

12. A Question:
What are some situations when you might not pursue an option that presents the best NPV?

13. Step 4: Consider the Influence of Qualitative Factors
Interactions between the Project and the Firm (e.g. strategic fit, risk/liability exposure)
Interactions between the Project and the Market (e.g. competitors, customers, suppliers)
Interactions between the Project and the Macro Environment (e.g. economic shifts, government regulations, social trends)
Ulrich & Eppinger, “Product Design and Development”