A Probabilistic Capital Budgeting Model for New Product Development under Stage-Gate Process

Abstract

Stage-gate model for new product development (NPD) and for any research and development (R&D) project consists of a series of stages and gates; each stage is a set of research activities and gates are milestones at which decisions are made based on predetermined criteria. In this paper we developed a capital budgeting model for a typical 5-stage, 5-gate process to be used for appraising commercial viability of the NPD at Stage 2 which will serve as one of the decision making criterion at Gate 3. Because in an NPD project, completion costs (capital investments), completion times, and future cash flows are uncertain, we developed the Pert-Beta probability distribution to encounter for the randomness of these variables. Furthermore, we suggested the model can be applied to real case NPD projects with the Monte Carlo Simulation approach. We then verified the workability of the model by applying it to a notional NPD project and demonstrated that all decision variables reach steady state in the Monte Carlo Simulation calculations.

A conceptual framework for impact of automotive engineering changes in new product development

“…Zacharia and Mentzer (2007) 2 Budget EC contributes to budget objectives of NPD project where firm establishes the budgeting model to minimise cost risks and ability to complete the project within allocated budget. Kim et al (2013), Sharifzadeh and Sharif (2015) and Zacharia and Mentzer (2007) 3 Market share EC contributes to market share objectives of NPD project where new product success is measured by firm using market performance in terms of sales and service indicators through product acceptance by consumers. Griffin and Page (1996), Mu (2015), Liu and Tsai (2007) and Zacharia and Mentzer (2007) 4 Speed to market EC contributes to speed to market objectives of NPD project through launch of product with technology and market newness.…”