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 dates 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. Which option should they choose?