PHS Consulting - New Product Case Study

A company’s R&D program had formulated a new product and developed technology for its manufacture. The initial view showed that a premium price could be obtained and a fully loaded plant would be highly profitable. The project was to evaluate the idea.

The evaluation was focussed upon building a financial model for the product showing the cash flow each year taking into account the initial investment, working capital, sales and expenses. This review identified a number of additional factors.

·	The initial investment was higher than expected because additional facilities were required to establish a manufacturing and distribution site

·	Sales, marketing and other business costs were not taken into account

·	Sales were highly seasonal leading to a substantial working capital requirement

·	It would take a period for the facility to be built and sales built up to fully load the plant thereby extending the financing requirements

·	There was a long term declining market trend and a history of failed attempts to enter the market

In conclusion, the likely returns were much lower than expected and there was a significant risk of failure. The project did not proceed.