Suppose that you are the CFO of a company and you are currently developing a new

Question

  Suppose that you are the CFO of a company and you are currently developing a new product, the widget. Your company has already invested $100 million in developing the widget. Unfortunately, the development is not quite finished and to make matters worse marketing has informed you that another company will introduce a similar product that will reduced the expected sales of your new product to $50 million. If it would cost $10 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development?

Explanation / Answer

We have already put in so much effort and investment (100 million) in the project to develop the new product and we need another 10 million to complete the development. So if i were the CFO of the company, i will go ahead with the development because it seems that we have already invested 90% of the amount ( 100/110) and if at that stage we back off, that huge investment will go waste and we will loss the whole amount straight away.

The risk of competitors doing something similar to us or developing similar product will always remain in the competitive market. It does not implies that we should should step back and should not take any action.

If i am aware that i will be loosing out on revenue because of the competition, i will put efforts to launch the product in a better way so that target audience will know our product and will choose us over competition.

If i am lossing out 50 million in revenue and i need 10 million to complete the project. I can spend money between 10 - 60 million to complete the project as soon as possible. If i complete the project way ahead by spending more, i will have chance to make up the spending by increase in revenue.

This is all assumptions based on the data given in the question. These scenarios can vary as per the information

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