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3 some features. View permissions Exhibit 8 McCarty's Data on the Different Development Options Estimates Forecasted market size (199597) 11 million units per year Potential
3 some features. View permissions Exhibit 8 McCarty's Data on the Different Development Options Estimates Forecasted market size (199597) 11 million units per year Potential Dell market share (good product, e.g. NiHi) 2.5 % (or 825,000 units over 3 years) Potential Dell market share (superb product, e.g. LiOn) = 3.0 % (or 990,000 units over 3 years) Average price per unit over life of product = $2400 Average gross margin per unit over life of product = $600 Expected product life = 3 years 4% of unit sales 18 months (incl. acceptance phase) $10 million Cost of each month delay in development schedule Expected length of development schedule Expected cost of development effort ijion 1: Continue with a proven battery technology (NiHi) o Condence = 100% (likelihood that it works as expected) 0 Net margin = 825,000 units x $600/unit $10m = $485 m ijign 2: Go with the new battery technology (LiOn) 0 Condence = 60% (likelihood that it works as expected); risky!!! 0 Net margin (if LiOn works) = 990,000 units x $600lunit - $10 m = $584 m 0 Net margin (if LiOn fails) = (825,000 units x 0.5) x $600/unit - ($10+0.3x$10) = $2345 m o If LiOn fails at launch, a switch to NiHi would require substantial rework (70% of original schedule and 30% of cost). Because competitors would have an established product on the market before them, Dell would lose about 50% of projected units sold. 0 If LiOn causes a failure, there could be spillover effects into the desktop business. Dell's reputation for quality could be tarnished. Option 3: Defer commitment until qualication phase review (dual development g overdesign) o If dual development pathsa: Estimated additional xed cost = $2.5 million 0 If product is overdesignedb: Estimated additional variable cost = 0.5% of revenue (2% of margin) 0 Gross margin (if LiOn works): = 990,000 units x $600/unit = $594 m (before additional cost) 0 Gross margin (if LiOn fails): = 825,000 units x $600/unit = $495 m (before additional cost) 0 The analysis assumes that Sony will give us enough information at the end of the qualification phase to determine with full certainty if LiOn will work or fail. If it fails, Dell can drop it and revert to option 1. a These are the actual project costs incurred. They include additional designers and engineers, material and tooling costs, etc. if we follow a dual path until the qualification phase review. The costs do not include the product opportunities we would forego if we had to pull people away from other projects
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