Question
GE is considering commercializing the Evolution Series of locomotive engines, which could deliver significant fuel-based cost savings to customers. Assume that it will cost GE
GE is considering commercializing the Evolution Series of locomotive engines, which could deliver significant fuel-based cost savings to customers. Assume that it will cost GE $7,500,000 to steer the Evolution Series through the entire new products process (opportunity identification and selection, concept generation, concept/project evaluation, development, and launch), that its asking price is $2,500,000 per locomotive, that ongoing annual product development costs will be $200,000 for the duration of the Evolution Series lifecycle, that it will keep the Evolution Series on the market for 20 years, and that it uses a cost of capital of 8% when calculating the net present value (NPV) of any new product. GE takes cash flows at the end of every year when making NPV calculations. If GE uses a risk premium of 10% for projects such as these, should it commercialize the Evolution Series?
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