Handstar Inc was created a little over 4 years ago by twocollege roommates to develop apps for smartphones. It has sincegrown to ten employees with annual sales approaching $1.5 million.Handstar's original product was an expense report app that allowedusers to record expenses on their smartphone and then export theirexpenses into a spreadsheet that then created an expense report inone of five standard formats. Based on the success of its firstproduct, Handstar subsequently developed three additional apps: anapp for tracking and measuring the performance of investmentportfolios, a calendar app, and an email app.
The two founders of Handstar have recently become concernedabout the competitiveness of the firm's offerings, particularlysince none of them has been updated since their initial launch.Therefore, they asked the directors of product development andmarketing to work together and prepare a list of potential projectsfor updating Handstar's current offerings as well as to developideas for additional apps. The directors were also asked toestimate the development costs of the various projects, productrevenues, and the likelihood that Handstar could retain or obtain aleadership position for the given app. Also, with the increasingpopularity of mobile computing, the founders asked the directors toevaluate the extent to which the products made use of the Web.
The product development and marketing directors identified threeprojects related to updating Handstar's existing products. Therefirst project would integrate Handstar's current calendar app withits email app. Integrating these two apps into a single app wouldprovide a number of benefits to users such as allowing them toautomatically enter the dates of meetings into the calendar basedon the content of an email message. The directors estimated thatthis project would require 1250 hours of software development time.Revenues in the first year of the product's launch were estimatedto be $750,000. However, because the directors expected that alarge percentage of the users would likely upgrade to this newproduct soon after its introduction, they projected that annualsales would decline by 10 percent annually in subsequent years. Thedirectors speculated that Handstar was moderately likely to obtaina leadership position in email/calendar apps if this project wereundertaken and felt this app made moderate use of the Web.
The second project related to updating the expense report app.The directors estimated that this project would require 400 hoursof development time. Sales were estimated to be $250,000 in thefirst year and to increase 5 percent annually in subsequent years.The directors speculated that completing this project would almostcertainly maintain Handstar's leadership position in the expensereport category, although it made little use of the Web.
The last project enhancement project related to enhancing theexisting portfolio tracking app. This project would require 750hours of development time and would generate first-year sales of$500,000. Sales were projected to increase 5 percent annually insubsequent years. The directors felt this project would have a highprobability of maintaining Handstar's leadership position in thiscategory and the product would make moderate use of the Web.
The directors also identified three opportunities for newproducts. One project was the development of a spreadsheet app thatcould share files with spreadsheet programs written for PCs.Developing this app would require 2500 hours of development time.First-year sales were estimated to be $1,000,000 with an annualgrowth rate of 10%. While this app did not make use of the Web, thedirectors felt that Handstar had a moderate chance of obtaining aleadership position in this product category.
The second new product opportunity identified was an app forbrowsing the Web. Developing this app would require 1875development hours. First-year sales was estimated to be $2,500,000with an annual growth rate of 15%. Although this app made extensiveuse of the Web, the directors felt that there was a very lowprobability that Handstar could obtain a leadership position inthis product category.
The final product opportunity identified was a trip planner app.This product would require 6250 hours of development time.First-year sales were projected to be $1,300,000 with an annualgrowth rate of 5%. Like the Web browser app, the directors feltthat there was a low probability that Handstar could obtain aleadership position in this category, although the program wouldmake extensive use of the Web.
In evaluating the projects, the founders believed it wasreasonable to assume each product had a 3-year life. They also feltthat a discount rate of 12% fairly reflected the company's cost ofcapital. An analysis of payroll records indicated that the cost ofsoftware developers is $52 per hour including salary and fringebenefits. Currently there are four software developers on staff,and each works 2500 hours per year.
Q1-Which projects would you recommend Handstar pursue based onthe NPV approach?
Q2-Assume the founders weigh a projects NPV twice as much asboth obtaining/retaining a leadership position and making use ofthe web. Use the weighted factor scoring method to rank theseprojects. Which projects would you recommend Handstar pursue?
Q3-In your opinion is having an additional software developmentengineer justified?
Handstar Inc was created a little over 4 years ago by twocollege roommates to develop apps for smartphones. It has sincegrown to ten employees with annual sales approaching $1.5 million.Handstar's original product was an expense report app that allowedusers to record expenses on their smartphone and then export theirexpenses into a spreadsheet that then created an expense report inone of five standard formats. Based on the success of its firstproduct, Handstar subsequently developed three additional apps: anapp for tracking and measuring the performance of investmentportfolios, a calendar app, and an email app.
The two founders of Handstar have recently become concernedabout the competitiveness of the firm's offerings, particularlysince none of them has been updated since their initial launch.Therefore, they asked the directors of product development andmarketing to work together and prepare a list of potential projectsfor updating Handstar's current offerings as well as to developideas for additional apps. The directors were also asked toestimate the development costs of the various projects, productrevenues, and the likelihood that Handstar could retain or obtain aleadership position for the given app. Also, with the increasingpopularity of mobile computing, the founders asked the directors toevaluate the extent to which the products made use of the Web.
The product development and marketing directors identified threeprojects related to updating Handstar's existing products. Therefirst project would integrate Handstar's current calendar app withits email app. Integrating these two apps into a single app wouldprovide a number of benefits to users such as allowing them toautomatically enter the dates of meetings into the calendar basedon the content of an email message. The directors estimated thatthis project would require 1250 hours of software development time.Revenues in the first year of the product's launch were estimatedto be $750,000. However, because the directors expected that alarge percentage of the users would likely upgrade to this newproduct soon after its introduction, they projected that annualsales would decline by 10 percent annually in subsequent years. Thedirectors speculated that Handstar was moderately likely to obtaina leadership position in email/calendar apps if this project wereundertaken and felt this app made moderate use of the Web.
The second project related to updating the expense report app.The directors estimated that this project would require 400 hoursof development time. Sales were estimated to be $250,000 in thefirst year and to increase 5 percent annually in subsequent years.The directors speculated that completing this project would almostcertainly maintain Handstar's leadership position in the expensereport category, although it made little use of the Web.
The last project enhancement project related to enhancing theexisting portfolio tracking app. This project would require 750hours of development time and would generate first-year sales of$500,000. Sales were projected to increase 5 percent annually insubsequent years. The directors felt this project would have a highprobability of maintaining Handstar's leadership position in thiscategory and the product would make moderate use of the Web.
The directors also identified three opportunities for newproducts. One project was the development of a spreadsheet app thatcould share files with spreadsheet programs written for PCs.Developing this app would require 2500 hours of development time.First-year sales were estimated to be $1,000,000 with an annualgrowth rate of 10%. While this app did not make use of the Web, thedirectors felt that Handstar had a moderate chance of obtaining aleadership position in this product category.
The second new product opportunity identified was an app forbrowsing the Web. Developing this app would require 1875development hours. First-year sales was estimated to be $2,500,000with an annual growth rate of 15%. Although this app made extensiveuse of the Web, the directors felt that there was a very lowprobability that Handstar could obtain a leadership position inthis product category.
The final product opportunity identified was a trip planner app.This product would require 6250 hours of development time.First-year sales were projected to be $1,300,000 with an annualgrowth rate of 5%. Like the Web browser app, the directors feltthat there was a low probability that Handstar could obtain aleadership position in this category, although the program wouldmake extensive use of the Web.
In evaluating the projects, the founders believed it wasreasonable to assume each product had a 3-year life. They also feltthat a discount rate of 12% fairly reflected the company's cost ofcapital. An analysis of payroll records indicated that the cost ofsoftware developers is $52 per hour including salary and fringebenefits. Currently there are four software developers on staff,and each works 2500 hours per year.
Q1-Which projects would you recommend Handstar pursue based onthe NPV approach?
Q2-Assume the founders weigh a projects NPV twice as much asboth obtaining/retaining a leadership position and making use ofthe web. Use the weighted factor scoring method to rank theseprojects. Which projects would you recommend Handstar pursue?
Q3-In your opinion is having an additional software developmentengineer justified?
