1 Which Projects Would You Recommend Handstar Pursue Based On The Npv Approach 2857847

Handstar Inc.
Handstar Inc. was created a little over four years ago by two college roommates to
develop software applications for handheld computing devices. It has since grown to ten
employees with annual sales approaching $1.5 million. Handstar’s original product was
an expense report application that allowed users to record expenses on their handheld
computers and then import these expenses into a spreadsheet that then create an expense
report in one of five standard formats. Based on the success of its first product, Handstar
subsequently developed three additional software products: a program for tracking and
measuring the performance of investment portfolios- a calendar program, and a program
that allowed users to download their email messages from their PC and read them on
their handheld computers.
The two founders of Handstar have recently become concerned about the competitiveness
of their offerings, particularly since none of them has been updated after their initial
launch. Therefore, they asked the directors of product development and marketing to
work together and prepare a list of potential projects for updating Handstar’s current
offerings as well as to develop ideas for additional offerings. The directors were also
asked to estimate the development costs of the various projects, product revenues, and the
likelihood that Handstar could retain or obtain a leadership position for the given product.
Also, with the increasing popularity of the Internet, the founders asked the directors to
evaluate the extent to which the products made use of the Internet.
The product development and marketing directors identified three projects related to
updating Handstar’s existing products. The first project would integrate Handstar’s current
calendar program with its email program. Integrating these two applications into a single
program would provide a number of benefits to users such as allowing them to
automatically enter the dares of meetings into the calendar based on the content of an
email message. The directors estimated that this project would require 1250 hours of
software development time. Revenues in the first year of the product’s launch were
estimated to be $750,000. However, because the directors expected that a large
percentage of the users would likely upgrade to this new product soon after its
introduction, they projected that annual sales would decline by 10 percent annually in
subsequent years. The directors speculated that Handstar was moderately likely to obtain
a leadership position in email/calendar programs if this project were undertaken and felt
this program made moderate use of the Internet.
The second project related to updating the expense report program. The directors
estimated that this project would require 400 hours of development time. Sales were
estimated to be $250,000 in the first year and to increase 5 percent annually in subsequent
years. The directors speculated that completing this project would almost certainly
maintain Handstar’s leadership position in the expense report category, although it made
little use of the Internet.
The last product enhancement project required enhancing the existing portfolio tracking
program. This project would require 750 hours of development time and would generate
first-year sales of $500,000. Sales were projected to increase 5 percent annually in
subsequent years. The directors felt this project would have a high probability of
maintaining Handstar’s leadership position in this category and the product would make
moderate use of the Internet.
The directors also identified three opportunities for new products. One project was the
development of a spreadsheet program that could share files with spread-sheet programs
written for PCs. Developing this product would require 2500 hours of development time.
First-year sales were estimated to be $1,000,000 with an annual growth rate of 10
percent. While this product did not make use of the Internet, the directors felt that
Handstar had a moderate chance of obtaining a leadership position in this product
category.
The second new product opportunity identified was a Web browser. Developing this
product would require 1875 development hours. First-year sales were estimated to be
$2,500,000 with an annual growth rate of 15 percent. Although this application made
extensive use of the Internet, the directors felt that there was a very low probability that
Handstar could obtain a leadership position in this product category.
The final product opportunity identified was a trip planner program that would work in
conjunction with a PC connected to the Web and download travel instructions to the
user’s handheld computer. This product would require 6250 hours of development time.
First-year sales were projected to be $1,300,000 with an annual growth rate of 5 percent.
Like the Web browser program, the directors felt that there was a low probability that
Handstar could obtain a leadership position in this category, although the program would
make extensive use of the Internet.
In evaluating the projects, the founders believed it was reasonable to assume each product
had a three-year life. They also felt that a discount rate of 12 percent fairly reflected the
company’s cost of capital. An analysis of pay-roll records indicated that the cost of
software developers is $52 per hour including salary and fringe benefits. Currently there
are four software developers on staff, and each works 2500 hours per year.
1. Which projects would you recommend Handstar pursue based on the NPV approach?
2. Assume the founders weigh a project’s NPV twice as much as both obtaining/retaining
a leadership position and making use of the Internet. Use the weighted factor scoring
method to rank these projects. Which projects would you recommend Handstar
pursue?
3. In your opinion is hiring an additional software development engineer justified?

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