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

Step 1: Build a Base-Case Model

Step 1: Build a Base-Case Model

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 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

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)