1. Why schedules are important
Win 2017
ECEN 490

2. Product Development Economics
Win 2017
ECEN 490

3. Homework Assignments
Determine how much you will pay in total for a car costing $10,000 which you finance at 5% for 5 years.
Using the PMT function in Excel = $ But you will actually pay 59 payments of $188.71, and 1 payment of $ This is a total of $11,322.74
Why a different final payment?
Win 2017
ECEN 490

4. Project - Economic Evaluations
Planning
Concept
Development
System-Level
Design
Detail
Design
Testing and
Refinement
Production
Ramp-Up
Go/No-Go Decision Gates
Sensitivity and Trade-off Analysis
Win 2017
ECEN 490

5. Product Development Cash Flow
Sales Revenue
Operating Costs +
Operating Profit
Payback Time
$’s
Net Profit
Development Time
Investment -
Break Even Time
Time
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ECEN 490

6. Inputs for Economic Analysis
Initial Expenses
Development cost and timing
Testing cost and timing
Tooling investment and timing
Ramp-up cost and timing
Marketing and support cost and timing
Win 2017
ECEN 490

7. Inputs for Economic Analysis
Ongoing Expenses
Marketing cost and timing
Product support cost and timing
Unit production cost
Displaced product revenue
Ongoing Income
Unit revenue
Sales volume and lifetime
Discount rate
Cost of acquiring money in the company
Win 2017
ECEN 490

8. What is money worth?
You give me $50 this year and I will give it back in a year?
No interest
You give me $50 this year and I will give you $53 next year?
Accrued interest
You give me $47 this year and I will give you $50 next year?
Discounted interest
Win 2017
ECEN 490

9. S S Net Present Value NPV = NPV = period cash flow (1 + discount rate)
periods N C S i
NPV = i
(1 + r)
i = 1
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ECEN 490

10. Net Present Value ExampleC S i
NPV = i
(1 + r)
i = 1
100 Dollars per year for the next 5 years
6% interest (discount rate)
NPV = 100/(1.06) + 100/(1.06) /(1.06) /(1.06) /(1.06)5
NPV = 100/ / / / /1.34
NPV = $421.24
Win 2017
ECEN 490

11. Project Financial Analysis
Most companies use NPV analysis of project cash flows.
First, compute base model NPV projection.
Sensitivity and trade-off analysis supports development decisions.
Qualitative factors also influence decisions.
Win 2017
ECEN 490

12. Qualitative Factors
Project technology has application to other future projects
Keep product line current
Comprehensive product line
Support or auxiliary products
Potential breakthrough technology
The boss likes it
etc.
Win 2017
ECEN 490

13. What is money worth? Why would Marginal rate be higher?
Bank Interest 1-3%
Corporate Earning Rate 6-10%
Marginal Rate for new projects 10-15%
Why would Marginal rate be higher?
Risk of new development
Other opportunities for use of funds.
Win 2017
ECEN 490

14. PDA High Capacity Disk Drive
Should we develop a new PDA attachment?
Win 2017
ECEN 490

15. Inputs for New Disk Drive Base Case analysis
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
$1.8million, 18 months
$400K, 1 year
$250k, 6 months
$150k, 6 months
$250k + $80k/year for product life
200k units/year, lifespan 2.5 years= 500k units
$44/unit + $2/unit overhead
$56/unit wholesale
10%/year
Win 2017
ECEN 490

16. Back of the envelope calculation
500,000 units at $56/unit = $28,000,000
Cost of 500,000 units at $46/unit = $23,000,000
Gross profit $5,000,000
Invest $2.6M to make $5M -- sounds good to me.
But………
What did we leave out?
Marketing expenses of $ 250K + $80K per year
Time value of money
Win 2017
ECEN 490

17. Go to the Excel Spreadsheet example
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ECEN 490

18. Rule of 78
The rule of 78 says, that you can divide 78 by the yearly interest rate and that will tell you how long it will take for you money to double at that interest rate.
For Example if you are getting 3% on your money in a savings account it will take you 26 (78/3) years to double your money.
If you can get 12% how long will it take?
Win 2017
ECEN 490

19. What to Remember
Financial analysis is driving product development decisions
Be supportive of ridiculously early requests for development costs, intervals, product costs, etc.
Economics can help drive your design decisions
Product development time versus product cost
Custom development, tooling, test fixtures versus product cost
Win 2017
ECEN 490

20. Personal economics What ways do companies compensate employees? Salary
Bonuses
Stock options.
Win 2017
ECEN 490

21. Stock Options What are they?
They provide the legal right to buy stock at a specific price (independent of the current market)
Options usually have a time window
Only after a specific date—usually a percentage each year.
Expiration date—usually 5 years
Win 2017
ECEN 490

22. Stock Options Example
Option to buy 500 shares of XYZ Corp at $24 per share
If XYZ shares are at $30 per share
Make $3000 today (30-24*500)
Wait till tomorrow and make $3500 (or $2000)
If XYZ shares fall to $23.75 per share
Worth nothing
Wait till tomorrow
Win 2017
ECEN 490

23. Stock Options Key Factors
Most options are given out at prices at the current market value
Market $18 per share
Option price $18 per share
Most option have a waiting period
1 to 2 years
When (If) the company goes public
Most options terminate with employment
Win 2017
ECEN 490

24. Stock Options Employment Considerations
You get a job offer from TeenyTiny Electronics
Offer is $6000 per year less than Intel
Offer includes 7500 options at $12 per share (exercise 6 months after public offering)
Is this a good economic offer?
Win 2017
ECEN 490

25. If you believe that the stock will be at $20 per share in a couple of years, then you may want to consider the job offer. (8*7500= $60,000)
Win 2017
ECEN 490

26. Homework assignment – due Mar 9th.
Design a test procedure that you will use to validate one of the key project specifications that you identified in your FSD. Also include as an appendix in the final report.
a description of the test, the required equipment, and if you are at a stage to actually run the test, also include the test results.
Win 2017
ECEN 490