1. Which projects would you recommend Handstar pursue based on the NPV approach? Based on the case above CASproduct revenues, and the likelihood that Handstar couldretain or obtain a leadership position for the given prod-uct. Also, with the increasing popularity of the Internet,Handstar Inc.Handstar Inc. was created a little over four years ago bytwo college roommates to develop software applicationsfor handheld computing devices. It has since grown toten employees with annual sales approaching $1.5 mil-lion. Handstar's original product was an expense reportapplication that allowed users to record expenses on theirhandheld computer and then import these expenses intoa spreadsheet that then created an expense report in oneof five standard formats. Based on the success of its firstproduct, Handstar subsequently developed three addi-tional software products: a program for tracking andmeasuring the performance of investment portfolios, acalendar program, and a program that allowed users todownload their email messages from their PC and readthem on their handheld computer.The two founders of Handstar have recently becomeconcemed about the competitiveness of the firm's offer-ings, particularly since none of them has been updatedsince their initial launch. Therefore, they asked thedirectors of product development and marketing to worktogether and prepare a list of potential projects for updat-ing Handstar's current offerings as well as to develop ideasfor additional offerings. The directors were also asked toestimate the development costs of the various projects,the founders asked the directors to evaluate the extent towhich the products made use of the Internet.The product development and marketing directorsidentified three projects related to updating Handstar'sexisting products. The first project would integrateHandstar's current calendar program with its emailprogram. Integrating these two applications into a sin-gle program would provide a number of benefits to userssuch as allowing them to automatically enter the datesof meetings into the calendar based on the content of anemail message. The directors estimated that this projectwould require 1250 hours of software development time.Revenues in the first year of the product's launch wereestimated to be $750,000. However, because the direc-tors expected that a large percentage of the users wouldlikely upgrade to this new product soon after its introduc-tion, they projected that annual sales would decline by10 percent annually in subsequent years. The directorsspeculated that Handstar was moderately likely to obtaina leadership position in email/calendar programs if thisproject were undertaken and felt this program made mod-erate use of the Internet.42CHAPTER 1 / THE WORLD OF PROJECT MANAGEMENTThe second project related to updating the expensereport program. The directors estimated that this projectwould require 400 hours of development time. Sales wereestimated to be $250,000 in the first year and to increase 5percent annually in subsequent years. The directors specu-lated that completing this project would almost certainlymaintain Handstar's leadership position in the expenseThe second new product opportunity identified wasa Web browser. Developing this product would require1875 development hours. First-year sales were estimatedto be $2,500,000 with an annual growth rate of 15 per-cent. Although this application made extensive use ofthe Internet, the directors felt that there was a very lowprobability that Handstar could obtain a leadership posi-tion in this product category.The final product opportunity identified was a tripplanner program that would work in conjunction with aPC connected to the Web and download travel instruc-report category, although it made little use of the Intermet.The last product enhancement project related toenhancing the existing portfolio tracking program. Thisproject would require 750 hours of development time andwoukd generate first-year sales of $500,000. Sales wereprojected to increase 5 percent annually in subsequentyears. The directors felt this project would have a highprobability of maintaining Handstar's leadership positionin this category and the product would make moderateuse of the Internet.The directors also identified three opportunities fornew products. One project was the development of aspreadsheet program that could share files with spread-sheet programs written for PCs. Developing this productwoukl require 2500 hours of development time. First-yearsales were estimated to be $1,000,000 with an annualgrowth rate of 10 percent. While this product did notmake use of the Intemet, the directors felt that Handstarhad a moderate chance of obtaining a leadership positionin this product category.tions to the user's handheld computer. This productwould require 6250 hours of development time. First-yearsales were projected to be $1,300,000 with an annualrowth rate of 5 percent. Like the Web browser program,the directors felt that there was a low probability thatHand-star could obtain a leadership position in this cat-egory, although the program would make extensive use ofthe Internet.In evaluating the projects, the founders believed itwas reasonable to assume each product had a three-yearlife. They also felt that a discount rate of 12 percent fairlyreflected the company's cost of capital. An analysis ofpayroll records indicated that the cost of software devel-opers is $52 per hour including salary and fringe benefits.Currently there are four software developers on staff, andeach works 2500 hours per year.

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Which projects would you recommend Handstar pursue based on the NPV approach? Based on the case above

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter10: Prices, Output, And Strategy: Pure And Monopolistic Competition

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