Technical, legal, economic, social and environmental aspects
A project with a net present value of 238 thousand stops being worthwhile if the selling price falls by barely 7 %, but it withstands 40 % more investment. Sensitivity analysis tells you where it pays to refine the estimates.
01The technical aspect
The technical analysis confirms that the product can be made with the available technology, within the deadline and with the project team. It reviews the architecture alternatives, the availability of components and their risk of obsolescence, the existence of more than one supplier for critical parts, the development and test tools needed, and the points of greatest uncertainty, which are best attacked first with prototypes. A list of technical risks with their probability, their impact and a planned action is part of the project, not an appendix.
02The legal aspect
A product rests on legal decisions: the legal form of its manufacturer, covered in commercial companies; contracts with customers and suppliers; compliance with technical standards; and intellectual property. In Argentina, inventions are protected with patents from the INPI (National Institute of Industrial Property) under Law 24,481, and software, as a work, by the copyright regime of Law 11,723. If the product uses open-source libraries or systems, their licenses must be respected, which may require publishing your own code. The professional liability of whoever signs the project was covered in professional liability. Like any rule, the laws cited must be consulted in their current text on InfoLEG.
03The economic aspect
The economic analysis builds the cash flow and calculates the net present value and the internal rate of return, as seen in project evaluation. But each number in the flow is an estimate. Sensitivity analysis moves one variable at a time and measures how much the NPV changes; the tornado diagram ranks the variables from the most influential to the least, and the critical change of each is the one that takes the NPV to zero:
A product with a price of ARS 250, 4000 units per year, a variable cost of ARS 150, fixed costs of ARS 150,000 per year, an investment of ARS 600,000 and a five-year life. Each bar goes from the NPV with the variable decreased to the NPV with the variable increased by the chosen percentage; the center line is the base NPV and the dashed one, zero.
05In the laboratory
Build the list of technical risks of the final project with probability, impact and planned action, and rank it.
Review the licenses of all the software libraries the project uses and note what obligations they impose.
Make the tornado diagram of the cash flow of the final project and decide which estimate is best to improve first.
06Common mistakes
- Presenting a single NPV number. Without sensitivity, you do not know how fragile the conclusion is.
- Using open source without reading the license. Some require releasing the product’s code.
- Forgetting the consumption during use in the environmental analysis. It often weighs more than manufacturing.
- Treating the social analysis as a filler paragraph. The privacy and safety of users are requirements.
07Self-assessment
What NPV does the lab project have at 15 %?
About ARS 238,000.
How much can the price fall before the NPV turns negative?
7.1 %.
And how much can the investment increase?
39.7 %.
With which body is an invention patented in Argentina?
The National Institute of Industrial Property (INPI).
08Further reading
- Nassir Sapag Chain and Reinaldo Sapag Chain. Preparación y evaluación de proyectos. McGraw-Hill. (In Spanish.) The technical, legal, economic and organizational studies, and sensitivity.
- Karl T. Ulrich and Steven D. Eppinger. Product Design and Development. McGraw-Hill. (Spanish edition: “Diseño y desarrollo de productos”.) Intellectual property and the economics of product development.
- International Organization for Standardization. ISO 14040: Environmental management — Life cycle assessment — Principles and framework. ISO. The framework for assessing the environmental impact of a product from end to end.
04The social and environmental aspects
The social analysis asks whom the product benefits and whom it may harm: the users, the workers who make it, the community. It includes accessibility, the privacy of the data it collects, the safety of people and the employment it creates or replaces, and it rests on professional ethics. The environmental analysis covers the life cycle: the materials and the manufacturing energy, the consumption during use —which in many devices is the largest impact— and the end-of-life fate as electronic waste, with the criteria seen in environmental management.