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Product Development Economics
Ali A. Yassine
Department of Industrial & Enterprise Systems Engineering
University of Illinois at Urbana Champaign
Planning
Planning
Product Development Process
Concept
Development
Concept
Development System-Level
Design
System-Level
Design Detail
Design
Detail
Design Testing and
Refinement
Testing and
Refinement Production
Ramp-Up
Production
Ramp-Up
•Go/No-Go Decision Gates
•Sensitivity and Trade-off Analysis
Product Development Cash Flow
Cumulative Cash
Inflow or Outflow ($)
Time
Investment
Investment (–)
Sales Revenue
Operating Profit
Operating Costs
Break Even
Time
Payback
Time
Development
Time
Project Financial Analysis
(also Business Case Analysis or Product Economics)
•Most common method is NPV analysis
of project cash flows.
•Base case model computes nominal
NPV.
•Sensitivity and trade-off analysis
supports development decisions.
•Qualitative factors also influence
decisions.
Net Present Value
NPV = period cash flow
(1 + discount rate) period
periods
Σ
NPV = C
(1 + r)i
Σ
Ni
i = 1
Inputs for NPV Base Case
•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
