Post on 29-Dec-2015
Economic Analysis for Product Development
(Ulrich and Eppinger)
1. Build a base-case financial model2. Perform a sensitivity analysis3. Use sensitivity analysis to understand project
trade-offs4. Consider the influence of qualitative factors
on project success
Annual interest divided by number of periods per year
Number of periods
Payments Made Each Period
Future Value
Using Excel for Q4 of Year 1:
Present Value of Year 3 Costs:(-2250)/(1+0.10/4)^3= -$2089
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
Ulrich & Eppinger, “Product Design and Development”
• 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)