A small software company that develops math libraries sees an opportunity to sell the library components for reuse in other commercial products, such as e-commerce web sites, banking systems, etc. They identify three products to target for a pilot effort:
(1) a compound interest calculator,
(2) a mortgage payment reduction calculator, and
(3) an exponential calculation function for cryptographic use. If the pilot is successful, they plan to launch a larger software reuse effort.
Market projections show that these three products could have sales of 10 per month. Assume that the price of the products will be the same.
Initial development of the software will require two developers/programmersfor a period of 4 months for each reuse component. The developers/programmers work 40 hours per week and earn $100 per hour with benefits.
Training the developers/programmers in reuse practices will require 1 week of training per person at a cost of $2000 plus salary. (This 1 week is considered to be part of the 4 months of development time.)
Establishment of a reuse database to catalog the reuse components will require start-up costs for a server ($900) and database software ($800). A database administrator will establish and manage this system. Because the database is initially small, the administrator will spend 80 hours over the 4-month period to establish the database and then 2 hours per week in maintenance. The database administrator earns $90 per hour. The database administrator will require 1 week of training at a cost of $3000
Given that the products will not be ready for market until 4 months after project initiation, how much must the company charge for the products to achieve an ROI for the start-up and maintenance costs for this effort within 12 months? Is this a reasonable cost for this product? What can the company do to achieve a faster ROI? Use a cash flow diagram to represent the data.