Spreadsheet

NEW PRODUCT INTRODUCTION

Dec-Soft Technologies is a software development company that offers an array of inexpensive PC-based decision-support solution products. These products are targeted for small-size companies that cannot afford the customized, high-end versions offered by majors like i-2 Technologies, SAP and so on. Gautam is the “brain” at Dec-Soft who is constantly coming up with new ideas. Well, he has come up with a new product idea yet again! The question is should this idea be considered seriously?

The product development cost for this idea is estimated to be Rs. 2,500,000. The market for this product can be expected to last only four years. It is expected that the product will be priced at Rs. 500. There is a small variable cost which includes the cost of making the product CD, packaging and shipping, which is expected to follow a normal distribution with a mean of 100 and a standard deviation of 15. The annual fixed cost will be about Rs. 2,000,000 with a 10% variation. This fixed cost comprises mainly of the cost of marketing and after sales service. It is expected that each value cost across this range has an approximately equal chance of occurrence. Sales volume in the first year will follow a triangular distribution with a minimum of 500 units, a mode of 6,000 units, and a maximum of 24,000 units. Sales volumes from year two to year four will be some fraction of the previous years. Specifically, sales in a given year will be some fraction of the sales in the previous year. However, the fraction will vary randomly. Further, the fraction in a given year will be independent of the fraction of other years. The fractions are expected to follow a truncated normal distribution with a mean of 0.9 and a standard deviation of 0.1. Basically, the first year will reveal broadly the extent of the demand for this product. Ignore taxes and use a discount rate of 10%.

Should Dec-Soft develop and introduce this product?

What is the chance that this...