INTRODUCTION
Nexcom System develops information technology systems for commercial sale.
Each year it considers and evaluates a number of different projects to undertake. It
develops a road map for each project in the form of a decision tree that identifies the
different decision points in the development process from the initial decision to invest in
a project’s development through the actual commercialization of the final product.
The first decision point in the development process is whether or not to fund a
proposed project for one year. If the decision is no, then there is no resulting cost; if the
decision is yes, then the project proceeds at an incremental cost to the company. The
company establishes specific short-term, early technical milestones for its projects after
one year. If the early milestone are achieved, the project proceeds to the next phase
of project development; if the milestone are not achieved, the project is abandoned.
In its planning process, the company develops probability estimates of achieving and
not achieving the early milestone. If the early milestones are achieved, then the project
is funded for further development during an extended time frame specific to a project.
At the end of this time frame, a project is evaluated according to a second set of
(later) technical, milestone. Again the company attaches probability estimates for
achieving and not achieving these later milestones. If the late milestones are not
achieved, the project is abandoned.
If the milestones are achieved, this means that technical uncertainties and
problems have been overcome and the company next assesses the project’s ability to
meet its strategic business objectives. At this stage the company wants to know if the
eventual product coincides with company’s competencies, and if there appears to be
an eventual, clear market for the product. It invests in a product “prelaunch” to
ascertain the answer to these questions. The outcomes of the prelaunch are the either
there is a strategic fit or there is not, and the company assigns probability estimates to
each of these two possible outcomes. If there is not a strategic fit at this point, the
project is abandoned and the company loses its investment in the prelaunch process. If
it is determined that there is a strategic fit, than three possible decision result. (1) The
company can invest in the product’s launch and a successful or unsuccessful outcome
will result, each with an estimated probability of occurrence. (2) The company can
delay the product’s launch and at a later date decide whether to launch or abandon.
(3) If it launch later, then the outcomes are success or failure, each with an estimated
probability of occurrence. Also, if the product launch is delayed, there is always a
likelihood that the technology will become obsolete or dated in the near future, which
tend to reduce the expected return.
The table provides the various costs, event probabilities, and investment
outcomes for five projects the company is considering.
Table 1.1
Decision Project
Outcomes/Event 1 2 3 4 5
Fund-1 year $200,000 380,000 270,000 230,00 400,000
P(Early milestones-yes) 0.72 0.64 0.84 0.56 0.77
P(Early milestones-no) 0.28 0.36 0.16 0.44 0.23
Long-term funding $690,000 730,000 430,000 270,000 350,000
P(Late milestones-yes) 0.60 0.56 0.65 0.70 0.72
P(Late milestones-no) 0.40 0.44 0.35 0.30 0.28
Pre-Launch funding $315,000 420,000 390,000 410,000 270,000
P(Strategic fit-yes) 0.80 0.75 0.83 0.67 0.65
P(Strategic fit-no) 0.20 0.25 0.17 0.33 0.35
P(Invest-success) 0.60 0.65 0.70 0.75 0.83
P(Invest-failure) 0.40 0.35 0.30 0.25 0.17
P(Delay-success) 0.80 0.70 0.65 0.80 0.85
P(Delay-failure) 0.20 0.30 0.35 0.20 0.15
Invest-success $7,300,000 8,200,000 4,700,000 5,200,000 3,800,000
Invest-failure -2,000,000 -3,500,000 -1,500,000 -2100,000 -900,000
Delay-success 4,500,000 6,000,000 3,300,000 2,500,000 2,700,000
Delay-failure -1,300,000 -4,000,000 -800,000 -1,100,000 -900,000
BODY
The key-issue is to maximize the revenue of Nexcom System through evaluating
projects development. This is a development of information technology systems for
commercial sale. There are five projects which have various costs and investment
outcomes for the projects that the company considering. One of the problems of the
company is that each phase of project development has things to be decided. These
are deciding whether to fund or not the proposed project and whether to invest or not
in a project’s development because of the possible outcome.
The company has the option of selecting whether to fund or not the project
which considers the possible cost and the probability that the project is abandoned.
The company also needs to decide whether to invest in the product’s launch or not.
They will have the option of delaying the product’s launch or just in time. If the product
launch is delayed, there is always a likelihood that the technology will become
obsolete or dated in the near future, which tend to reduce the expected return.
