Re: Profitability of Ada Educational Sales (was: Ada is not a failure.

[magnesium.club.cc.cmu.edu!news.sei.cmu.edu!firth@uunet.uu.net (Robert Fi]

In article <1993Aug9.165056.13371@fcom.cc.utah.edu> tcrook@u.cc.utah.edu (Tom C
rook) writes:

>The NPV method correctly handles projects that are profitable but have
>large up-front investments and long term payoffs.  Perhaps one of the
>reasons so many companies (and their stockholders and the market itself)
>are oriented towards short-term profits is the overuse of break-even
>analysis.

On the whole, I'd agree.  All costs incurred are "sunk costs" in the
sense that they have no bearing on what will sell today, or at what
price.  Hence, the marketing strategy for a product already developed
must be in terms only of future costs and revenues.  Unfortunately,
one such future cost is the cost of debt service - so sunk costs that
have been paid for by borrowing are not quite sunk without trace, and
I've seen marketing strategy distorted by the pressures of debt service
more than once.

However, I'm not sure I agree that NPV is always the correct way to
cost projects, because it tends to neglect the element of risk present
in any long-term project.  For example, suppose you plan to invest
$100 million is a really slick implementation of a new standard
programming language, an investment to be recovered by sales over
ten years.  Two years later, the owner of the standard announces a
wholesale revision of the language that it will cost you another
$50 million to cope with.  In effect, $50 million in "investment"
(or "sunk cost") has been wiped out by political fiat.  And the
company that gambled on soaking the customer and breaking even in
18 months flat is laughing all the way to the bank...