Economic Analysis for Product Development (Ulrich and Eppinger)

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Presentation transcript:

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

Step 1: Build a Base-Case Model

Step 1: Build a Base-Case Model

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

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

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

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

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

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

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

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”