Question 1 --A business case (used to decide if a new enhancement should be adop

Question

Question 1 --A business case (used to decide if a new enhancement should be adopted for a product) should have the form of an income statement. Why? Why is NPV developed on such a product? What other measures should be present in a business case to decide Go/No Go decision on a new product feature?

Question 2-- What are examples, other than from the book, of the following (Identify which of these your firm uses): Captive Pricing Reference Pricing ELDP Wholesale Pricing Zone Pricing Price Discrimination

Explanation / Answer

1.
Yes, it should have the form of the income statement.
Income statement tells the revenue received, expenses incurred and net profit generated by the existing product portfolio. A carefully projected income statement on the basis of product portfolio having product with the enhanced features, is used for the incremental analysis in terms of incremental revenue, incremental expenses and incremental net profits. It is the first basis of analysis of the impact of product with enhanced features. Hence, the income statement is a good measure of the outcome of the investment decisions.
Net present value (NPV) tells the company the quantum of money, by which the company will get richer or poorer. Hence, the company can easily take the decision upon the investment proposals without any ambiguity of interest rates or any other factors. If NPV is positive then the company can go ahead with the proposals, otherwise the company can reject the proposal. Though, the company can go with other aspects of the evaluation process. These aspects are as follows:
A.   Follow the other methods such as uniform annual worth methods if project lives are unequal.
B.   Economic risk analysis under the different state of the economy and cash flows under each state of the economy.
C.   Capital rationing using profitability index so that multiple projects can be pursued with the given budget.
D.   Certainty equivalent analysis of the cash flows related to the project to get the more conservative views

Above measures should also be considered in the business case before making a go or no go decisions.

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