Economic Analysis
for Product Development
(Ulrich and Eppinger)
1. Build a base-case financial model
2. Perform a sensitivity analysis
3. Use sensitivity analysis to understand project
trade-offs
4. Consider the influence of qualitative factors
on project success
Step 1: Build a Base-Case Model
Step 1: Build a Base-Case Model
Using Excel for Q4 of Year 1:
Present Value of Year 3 Costs:
(-2250)/(1+0.10/4)^3= -$2089
Annual interest divided
by number of periods
per year
Future Value
Payments Made Each Period
Number of periods
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
• 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)
Ulrich & Eppinger, “Product Design and Development”