The chief engineer for Portland’s Purifies, a maker of industrial water filters

Question

The chief engineer for Portland’s Purifies, a maker of industrial water filters with annual sales of $5 million, has an idea for a new product that would represent a major (and patentable) improvement over current market offerings. She estimates that he development of the product will cost half a million dollars, including tooling the manufacturing line. The last product launch cost about $200,000 in marketing and promotion costs. She thinks the product would sell for about $50,000 and should sell 75 units in Year 1, 140 in Year 2, and then level out at 200 per year. Contribution margin is 40%. Should the company continue with this project? What do you need to know about the company in order to understand its decision to go or not go ahead? What is the payback period?

Explanation / Answer

Since tooling, manufacturing and marketing cost together cost about dollar 700,000 and by merely selling 75 units company clocks 3,750,000 dollars and with 40% margin generates dollar 1,500,000; at first glance continueing the project makes sense.

it is crude proposition to go ahead with project, and many vital information is required about the company and its business environment before a concluding decision could be taken up. Some of the required information are...(Not Exhaustive)

1. Cost of capital and its source.

2. Possible increasei in operating expenses

3. Marketing and promotion expenses is recurring and at same level or not.

4. Servicing cost and efforts need to be accounted.

5. Possibilites of emergent competition and any disruptive Innovation.

6. Companies competitive position in market and brand perception among target market.

One needs to slice information on Financial, Marketing and operating heads for analysis. Furthermore the future earnings and expenses must be discontinued at proper rate and arrive their Net Present Value.

Exact payback period can't be calculated from given data, yet it is plausible that company will make profit in first year itself.

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