Tax Credits -Federal or state incentives for activity in the public interest. Applicable Depreciation Rate Policy question, set by management Federal and State Income Tax Rate -Company figure, provided Required Rate of Return -This tells us the cash flow discount rate to be used, and can be complex and political. Theoretically, the figure to use is the weighted average cost of capital, including the three sources of capital--debt, preferred stock, and retained earnings. Often is simply the firm's current borrowing rate. May be the rate of earnings from current operations. Basic Sales and Cost Forecasts The primary data inputs: the number of units to be sold, the direct production cost per unit, and the total marketing expenditures. OUTPUT Net Present Value (NPV) The sum of the discounted cash flows over the life of the product FINANCIAL Exercisel Financial analysis of new products at Bay City Electronics had always been rather informal. Bill Roberts, who founded the firm in 1970, knew residential electronics because he had worked for almost seven years for another firm specializing in home security systems. But, he had never been trained in financial analysis. In fact, all he knew was what the bank had asked for every time he went to discuss his line of credit Bay City had about 45 full-time employees (plus a seasonal factory work force) and did in the neighborhood of $18 million in sales. His products all related to home security and were sold by his sales manager, who worked wholesalers, hardware and department store chains, and other large retailer. He did some consumer advertising, but not much. with a group of manufacturers' reps, who in turn called on Bill was inventive, however, and had built the business primarily by coming up with new techniques. His latest device was a remote-controlled electronic closure for any door in the home. The closure was effected by a special ringing of the telephone: for example, if a user wanted to leave a back door open until 9:00 p.m. it was simple to call the house at 9:00 and wait for 10 rings, after which the electronic device would switch the door to a locked position. A similar call would reopen the door The bank liked the idea but wanted Bill to do a better job of financial analysis. Based on his understanding of this market, Bill filled out the FINANCIAL worksheet as appears at the end of the exercise. To date, Bay City had spent S85,000 in expense money for supplies and labor developing the closure and had invested $15,000 in a machine (asset). If the company decided to go ahead, it would have to invest $50,000 more in a new facility, continue R&D to validate and This is a condensed version of the Bay City Electronics case in the New Products Management text by Crawford and Di Benedetto
