Question

Given a financial analysis of the three products

	Product A	Product B	Product C
Annual volume (units)	10,000	8,000	6,000
Profit per unit	$2.64	$3.91	$5.96
Lifetime of product (years)	10	6	12
Total Development Cost	$50,000	$70,000	$100,000

a. Compute the expected return on investment over the lifetime of each product.

b. Given the probability of commercial success of A, B, and C are 0.6, 0.8, 0.9 respectively, compute the expected return on investment over the lifetime of each product.

c. Rank your product and compare the ranking with one in Question 1.

Answer 1

a. Product A:

Return = (10,000 x 10 x 2.64) = $264,000. Investment Amt = $50,000.

Return on investment = (264,000/50,000) x 100 = 528%

Product B:

Return = (8,000 x 6 x 3.91) = $187,680. Investment Amt = $70,000.

Return on investment = (187,680/70,000) x 100 = 268%

Product C:

Return = (6,000 x 12 x 5.96) = $429,120. Investment Amt = $100,000.

Return on investment = (429,120/100,000) x 100 = 429.12%

b. Product A: Expected Return = 528% x 0.6 = 316.8%

Product B: Expected Return = 268% x 0.8 = 214.4%

Product C: Expected Return = 429.12% x 0.9 = 386.08%

c. Ranks - Product (Based on probability)

Rank 1 - Product C

Rank 2 - Product A

Rank 3 - Product B

Ranks - Product (Not based on probability)

Rank 1 - Product A

Rank 2 - Product C

Rank 3 - Product B