Chapter 18

Product Development Economics

Patrick Fernando
11801004
 Types of Economic Analysis

 Quantitative Analysis
 Qualitative Analysis
When Should Economic Analysis
Performed?
Economic analysis is useful in this 2 different
circumstances :
 Go/no-go milestones
 Operational design and development decisions
4 Step Method for Economic Analysis

There are four steps in order to do an economic analysis, which is :

 Build a base-case financial model to compute expected profit
 Perform sensitivity analysis to understand the key assumptions of the
model
 Use sensitivity analysis to understand project trade-offs
 Consider the influence of qualitative factors on project success
1. Build a Base-Case Financial Model

Constructing the base-case model consists of estimating the

future cash flows and then computing the NPV of those cash
flows.
Computing the NPV involves simply summing the cash flow for each
period and then converting (discounting) this cash flow to its present
value (its value in today’s dollars) using the appropriate discount rate.
2. Perform Sensitivity Analysis

There are two factors that can influence project value, which is :
 Internal Factors
 External Factors
3. Use Sensitivity Analysis to Understand
Trade-Offs
There are 3 aspects of this step, which is :
 Potential Interactions
 Trade-Off Rules
 Limitations of Quantitative Analysis
4. Consider the Influence of Qualitative
Factors
Many factors influencing development projects are difficult to quantify because
they are complex or uncertain. We refer to such factors as qualitative factors.
The most basic approach to qualitative analysis is to consider :
 The interactions between the project and the firm as a whole
 The interactions between the project and the market in which the product is
sold
 The interactions between the project and the macro environment
Carrying Out Qualitative Analysis

For most project teams, the most appropriate qualitative analysis method is
simply to consider and discuss the interactions between the project and the firm,
the project and the market, and the project and the macro environment. Then
the team considers these interactions in concert with the results of the
quantitative analysis to determine the most appropriate relative emphasis on
development speed, development expense, manufacturing cost, and product
performance
 THANK YOU FOR
YOUR ATTENTION!
Quiz Question

1. When is the best circumstance to perform an economic

analysis? Give an explanation and two examples of
questions for each circumstances!
2. What are the two factors that influence the project value?
give the example of each factor (Minimal 2)!
3. Explain the problems/limitations from quantitative
analysis!