Phil Young, founder of Pedal Pushers, expects to spend the next six months developing and testing prototypes for a pedal replacement for children's bicycles. (See Part A of Problem 2 for a description of the proposed product.) Phil anticipates paying monthly rent of $700 for space in a local warehouse where the Pedal Pusher product will be designed, developed, and tested. Utility expenses for electricity and heat are estimated at $150 per month. Phil plans to pay himself a salary of $1,000 per month. Materials needed to build and test an initial prototype product are expected to cost $9,500. Each redesign and new prototype will require an additional $4,500 investment. Phil anticipates that, before the final Pedal Pusher is ready for market at the end of six months, three prototypes will have been built and tested. Costs associated with test marketing the Pedal Pusher are estimated at $7,000.
A. Determine the amount of financial capital that Phil Young will need during the six months it will take to develop and test-market the Pedal Pusher.
B. What type of financial capital is needed? What are the likely sources of that capital for Phil Young?
C. What would be your estimate of the amount of financial capital needed if the product development period lasted nine months?
D. What compensation arrangements would you recommend as he hires additional members of the management team?