5.4. For this problem, use the following abbreviations:

• Project organization to manage project: silo (S); liaison (L); matrix

(M); self-direct teams (T)

• Product as needing resources: research (R); advanced development

(A); and development (D)

• Describing the product as revolutionary (R); evolutionary (E); or platform/architecture (P)

• Describing the process as job shop (J); batch (B); assembly line (L);

flow line (F)

• Estimate R&D investment in terms of percent of potential sales as low (L); medium (M); high (H) Please provide your answer with the most appropriate selection given the scant details in the questions.

A company is designing a new inductive proximity technology for touch screens in smart-phones.

The company needs a $1,000,000 ($1M) investment for a project to develop the product. It assumes a rate i% = 8% and estimates the market potential at 500,000 units/year for the future up to eight years.

Their options are:

1. Get a $1M loan, develop the technology in-house for one year, sell 500,000 units for eight years at $1/unit with income to the company starting after one year of loan approval, and repay the loan after one year for five years at $240,000/year.

2. Get an existing company to licensee a less-capable technology, plan to sell the phones immediately for only five years, since the technology will becomes obsolete earlier, and then pay them royalties of $0.25 per unit for five years. Assume no tax/depreciation consequences.

a. Describe the project characteristics: Organization ____, resources needed____, product description____, process ____ R&D%____

b. What is the best choice for the company? Which tool would you use: ROI or PV? Which choice: borrow or license?

c. Show calculations (both formula and actual #) for Option 1. Get a

$1M loan, develop the technology in-house for one year, and sell 500,000 units/year for eight years at $1/unit with income to the company starting after one year of loan approval, and repay the loan after one year for five years at $240,000/year.

d. Show calculations (both formula and actual #) for Option 2. Get an existing company to licensee a less-capable technology, plan to sell the phones immediately for only five years, since the technology becomes obsolete and then pay them royalties of

$0.25 per unit for five years