ecen 490 1 fall 2015 why schedules are important
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ECEN 490 1Fall 2015
Why schedules are important
ECEN 490 2Fall 2015
Product Development Economics
ECEN 490 3Fall 2015
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 = $188.712336. But you will actually pay 59 payments of $188.71, and 1 payment of $188.85 . This is a total of $11,322.74
Why a different final payment?
ECEN 490 4Fall 2015
Project - Economic Evaluations
PlanningPlanning ConceptDevelopment
ConceptDevelopment
System-LevelDesign
System-LevelDesign
DetailDesign
DetailDesign
Testing andRefinement
Testing andRefinement
ProductionRamp-Up
ProductionRamp-Up
Go/No-Go Decision Gates
Sensitivity and Trade-off Analysis
ECEN 490 5Fall 2015
Product Development Cash Flow Sales Revenue
Operating Profit
Operating Costs
Break EvenTime
PaybackTime
DevelopmentTime
Time
Net Profit$’s
+
Investment
-
ECEN 490 6Fall 2015
Inputs for Economic Analysis
Initial ExpensesDevelopment cost and timingTesting cost and timingTooling investment and timingRamp-up cost and timingMarketing and support cost and timing
ECEN 490 7Fall 2015
Inputs for Economic Analysis Ongoing Expenses
Marketing cost and timingProduct support cost and timingUnit production cost Displaced product revenue
Ongoing IncomeUnit revenue Sales volume and lifetime
Discount rateCost of acquiring money in the company
ECEN 490 8Fall 2015
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
ECEN 490 9Fall 2015
Net Present Value
NPV =period cash flow
(1 + discount rate)period
periods
NPV =C
(1 + r)i
Ni
i = 1
ECEN 490 10Fall 2015
Net Present Value Example
NPV =C
(1 + r)i
Ni
i = 1
•100 Dollars per year for the next 5 years•6% interest (discount rate)
NPV = 100/(1.06) + 100/(1.06)2 + 100/(1.06)3 + 100/(1.06)4 + 100/(1.06)5
NPV = 100/1.06 + 100/1.12 + 100/1.19 + 100/1.26 + 100/1.34
NPV = $421.24
ECEN 490 11Fall 2015
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.
ECEN 490 12Fall 2015
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.
ECEN 490 13Fall 2015
What is money worth? 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 developmentOther opportunities for use of funds.
ECEN 490 14Fall 2015
PDA High Capacity Disk Drive
Should we develop a new PDA attachment?
ECEN 490 15Fall 2015
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
ECEN 490 16Fall 2015
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
ECEN 490 17Fall 2015
Go to the Excel Spreadsheet example
ECEN 490 18Fall 2015
Rule of 78The 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?
ECEN 490 19Fall 2015
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 decisionsProduct development time versus product costCustom development, tooling, test fixtures
versus product cost
ECEN 490 20Fall 2015
Personal economics
What ways do companies compensate employees?
Salary Bonuses Stock options.
ECEN 490 21Fall 2015
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 windowOnly after a specific date—usually a
percentage each year.Expiration date—usually 5 years
ECEN 490 22Fall 2015
Stock Options Example
Option to buy 500 shares of XYZ Corp at $24 per share
If XYZ shares are at $30 per shareMake $3000 today (30-24*500)Wait till tomorrow and make $3500 (or $2000)
If XYZ shares fall to $23.75 per shareWorth nothingWait till tomorrow
ECEN 490 23Fall 2015
Stock Options Key Factors
Most options are given out at prices at the current market valueMarket $18 per shareOption price $18 per share
Most option have a waiting period1 to 2 yearsWhen (If) the company goes public
Most options terminate with employment
ECEN 490 24Fall 2015
Stock OptionsEmployment 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?
ECEN 490 25Fall 2015
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)
ECEN 490 26Fall 2015
Homework assignment – dueOct 22nd. Design a test procedure that you will use
to validate one of the key project specifications that you identified in your FSD.
Email 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.