You are thinking about investing $100,000 in a new product.
Sales expections are $95,000.
If R & D will cost another $3,000, should you invest in the product? Explain.
To determine whether you should invest in the product, you need to evaluate the profitability of the investment. Here's how you can calculate it:
1. Start by subtracting the R&D cost from your initial investment:
Investment - R&D cost = $100,000 - $3,000 = $97,000
2. Next, subtract the sales expectations from the remaining investment:
Profitability = $97,000 - $95,000 = $2,000
If the result is positive, it indicates a potential profit. In this case, the profitability is $2,000. However, the profitability alone doesn't provide enough information to make a decision. You need to consider other factors such as the payback period, breakeven point, and expected returns.
For example, if the payback period is relatively short and the breakeven point is attainable, it suggests a higher likelihood of success and a reasonable return on investment. Additionally, you can assess market conditions, demand for the product, competition, and potential risks involved.
It's important to note that this simplified analysis assumes all costs are accounted for and all sales expectations will be met. Market conditions and various other factors can significantly impact the actual profitability. Therefore, conducting a thorough analysis and consulting with professionals or experts in the field is advisable before making any investment decisions.