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Which projects would you recommend Handstar  pursue based on the NPV approach?  Based on the case above

Which projects would you recommend Handstar  pursue based on the NPV approach?  Based on the case above

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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1. Which projects would you recommend Handstar 
pursue based on the NPV approach?  Based on the case above

CA S product revenues, and the likelihood that Handstar could retain or obtain a leadership position for the given prod- uct. Also, with the increasing popularity of the Internet, Handstar Inc. Handstar Inc. was created a little over four years ago by two college roommates to develop software applications for handheld computing devices. It has since grown to ten employees with annual sales approaching $1.5 mil- lion. Handstar's original product was an expense report application that allowed users to record expenses on their handheld computer and then import these expenses into a spreadsheet that then created an expense report in one of five standard formats. Based on the success of its first product, Handstar subsequently developed three addi- tional software products: a program for tracking and measuring the performance of investment portfolios, a calendar program, and a program that allowed users to download their email messages from their PC and read them on their handheld computer. The two founders of Handstar have recently become concemed about the competitiveness of the firm's offer- ings, particularly since none of them has been updated since their initial launch. Therefore, they asked the directors of product development and marketing to work together and prepare a list of potential projects for updat- ing Handstar's current offerings as well as to develop ideas for additional offerings. The directors were also asked to estimate the development costs of the various projects, the founders asked the directors to evaluate the extent to which the products made use of the Internet. The product development and marketing directors identified three projects related to updating Handstar's existing products. The first project would integrate Handstar's current calendar program with its email program. Integrating these two applications into a sin- gle program would provide a number of benefits to users such as allowing them to automatically enter the dates of meetings into the calendar based on the content of an email message. The directors estimated that this project would require 1250 hours of software development time. Revenues in the first year of the product's launch were estimated to be $750,000. However, because the direc- tors expected that a large percentage of the users would likely upgrade to this new product soon after its introduc- tion, they projected that annual sales would decline by 10 percent annually in subsequent years. The directors speculated that Handstar was moderately likely to obtain a leadership position in email/calendar programs if this project were undertaken and felt this program made mod- erate use of the Internet. 42 CHAPTER 1 / THE WORLD OF PROJECT MANAGEMENT The second project related to updating the expense report program. The directors estimated that this project would require 400 hours of development time. Sales were estimated to be $250,000 in the first year and to increase 5 percent annually in subsequent years. The directors specu- lated that completing this project would almost certainly maintain Handstar's leadership position in the expense The second new product opportunity identified was a Web browser. Developing this product would require 1875 development hours. First-year sales were estimated to be $2,500,000 with an annual growth rate of 15 per- cent. Although this application made extensive use of the Internet, the directors felt that there was a very low probability that Handstar could obtain a leadership posi- tion in this product category. The final product opportunity identified was a trip planner program that would work in conjunction with a PC connected to the Web and download travel instruc- report category, although it made little use of the Intermet. The last product enhancement project related to enhancing the existing portfolio tracking program. This project would require 750 hours of development time and woukd generate first-year sales of $500,000. Sales were projected to increase 5 percent annually in subsequent years. The directors felt this project would have a high probability of maintaining Handstar's leadership position in this category and the product would make moderate use of the Internet. The directors also identified three opportunities for new products. One project was the development of a spreadsheet program that could share files with spread- sheet programs written for PCs. Developing this product woukl require 2500 hours of development time. First-year sales were estimated to be $1,000,000 with an annual growth rate of 10 percent. While this product did not make use of the Intemet, the directors felt that Handstar had a moderate chance of obtaining a leadership position in this product category. tions to the user's handheld computer. This product would require 6250 hours of development time. First-year sales were projected to be $1,300,000 with an annual rowth rate of 5 percent. Like the Web browser program, the directors felt that there was a low probability that Hand-star could obtain a leadership position in this cat- egory, although the program would make extensive use of the Internet. In evaluating the projects, the founders believed it was reasonable to assume each product had a three-year life. They also felt that a discount rate of 12 percent fairly reflected the company's cost of capital. An analysis of payroll records indicated that the cost of software devel- opers is $52 per hour including salary and fringe benefits. Currently there are four software developers on staff, and each works 2500 hours per year.
Transcribed Image Text:CA S product revenues, and the likelihood that Handstar could retain or obtain a leadership position for the given prod- uct. Also, with the increasing popularity of the Internet, Handstar Inc. Handstar Inc. was created a little over four years ago by two college roommates to develop software applications for handheld computing devices. It has since grown to ten employees with annual sales approaching $1.5 mil- lion. Handstar's original product was an expense report application that allowed users to record expenses on their handheld computer and then import these expenses into a spreadsheet that then created an expense report in one of five standard formats. Based on the success of its first product, Handstar subsequently developed three addi- tional software products: a program for tracking and measuring the performance of investment portfolios, a calendar program, and a program that allowed users to download their email messages from their PC and read them on their handheld computer. The two founders of Handstar have recently become concemed about the competitiveness of the firm's offer- ings, particularly since none of them has been updated since their initial launch. Therefore, they asked the directors of product development and marketing to work together and prepare a list of potential projects for updat- ing Handstar's current offerings as well as to develop ideas for additional offerings. The directors were also asked to estimate the development costs of the various projects, the founders asked the directors to evaluate the extent to which the products made use of the Internet. The product development and marketing directors identified three projects related to updating Handstar's existing products. The first project would integrate Handstar's current calendar program with its email program. Integrating these two applications into a sin- gle program would provide a number of benefits to users such as allowing them to automatically enter the dates of meetings into the calendar based on the content of an email message. The directors estimated that this project would require 1250 hours of software development time. Revenues in the first year of the product's launch were estimated to be $750,000. However, because the direc- tors expected that a large percentage of the users would likely upgrade to this new product soon after its introduc- tion, they projected that annual sales would decline by 10 percent annually in subsequent years. The directors speculated that Handstar was moderately likely to obtain a leadership position in email/calendar programs if this project were undertaken and felt this program made mod- erate use of the Internet. 42 CHAPTER 1 / THE WORLD OF PROJECT MANAGEMENT The second project related to updating the expense report program. The directors estimated that this project would require 400 hours of development time. Sales were estimated to be $250,000 in the first year and to increase 5 percent annually in subsequent years. The directors specu- lated that completing this project would almost certainly maintain Handstar's leadership position in the expense The second new product opportunity identified was a Web browser. Developing this product would require 1875 development hours. First-year sales were estimated to be $2,500,000 with an annual growth rate of 15 per- cent. Although this application made extensive use of the Internet, the directors felt that there was a very low probability that Handstar could obtain a leadership posi- tion in this product category. The final product opportunity identified was a trip planner program that would work in conjunction with a PC connected to the Web and download travel instruc- report category, although it made little use of the Intermet. The last product enhancement project related to enhancing the existing portfolio tracking program. This project would require 750 hours of development time and woukd generate first-year sales of $500,000. Sales were projected to increase 5 percent annually in subsequent years. The directors felt this project would have a high probability of maintaining Handstar's leadership position in this category and the product would make moderate use of the Internet. The directors also identified three opportunities for new products. One project was the development of a spreadsheet program that could share files with spread- sheet programs written for PCs. Developing this product woukl require 2500 hours of development time. First-year sales were estimated to be $1,000,000 with an annual growth rate of 10 percent. While this product did not make use of the Intemet, the directors felt that Handstar had a moderate chance of obtaining a leadership position in this product category. tions to the user's handheld computer. This product would require 6250 hours of development time. First-year sales were projected to be $1,300,000 with an annual rowth rate of 5 percent. Like the Web browser program, the directors felt that there was a low probability that Hand-star could obtain a leadership position in this cat- egory, although the program would make extensive use of the Internet. In evaluating the projects, the founders believed it was reasonable to assume each product had a three-year life. They also felt that a discount rate of 12 percent fairly reflected the company's cost of capital. An analysis of payroll records indicated that the cost of software devel- opers is $52 per hour including salary and fringe benefits. Currently there are four software developers on staff, and each works 2500 hours per year.
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