Financial Risk and Uncertainty in New Product Development: A Case Study

Abstract

New product development can be financially risky for companies due to the lack of specific costs and sales data. At the same time developing these new products can be important for capturing market share and profitability. Launching new products is associated with uncertainty. It requires financial evaluations to identify potential losses if the product does not meet required standards or if the market is not sufficient to break even. Every product development project is unique because of its varied technical and market attributes. Financial feasibility analysis involves uncertainties and is dependent on the assumptions such as sales volume, unit price, and market volatility. Uncertainty can also lie in warranty and liability issues related to the new product. Sales can be influenced by companion sales of related products. This paper presents a case study of a HVAC (heating, ventilation and air-conditioning) product that was launched successfully in 2005 and is still being sold. This product is manufactured and transported to the required location via truck-trailers. The case study shows financial risks that were assumed before the product was launched and the present financial status. The product's life cycle is covered including its predicted break-even point and sensitivity analysis. The financial analysis is based on investment cost, future cash flow, interest rate, time uncertainty, and market uncertainty. Discounted cash flow and real options approaches are discussed which shows the product's financial viability. The case study is an example of issues that should be considered during new product development. Guidance is provided for modifying the analysis procedure for other new product development projects.

Meeting Name

28th Annual National Conference of the American Society for Engineering Management (2007: Nov. 7-10, Chattanooga, TN)

Department(s)

Engineering Management and Systems Engineering

Second Department

Psychological Science

Keywords and Phrases

Discounted cash flow; Feasibility analysis; Financial risks; New product development; New product development projects; Product development projects; Real options approach; Uncertainty; Air conditioning; Commerce; Competition; Cost benefit analysis; Costs; Innovation; Investments; Product development; Product liability; Research; Risk perception; Sales; Uncertainty analysis

International Standard Book Number (ISBN)

978-1-60560-999-7

Document Type

Article - Conference proceedings

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2007 American Society for Engineering Management, All rights reserved.

Publication Date

10 Nov 2007

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