Investments for New Product Development: A Break-Even Time Analysis

Abstract

Combining the product-process matrix and cost-volume-profit analysis, we identify a pattern of annual cash flows for new product development (NPD) and name it the New Product Investment Curve (NPIC). A sample of 411 firms provides confirming evidence for the NPIC. On average, firms needed 12 years to recover their initial and subsequent investments for NPD. The break-even time, however, exhibits significant differences across industries depending on the speed of innovation and the cost structure of each industry. Engineering managers in an industry with high R&D and high fixed costs need to prepare for longer break-even times than those in other industries. This article provides implications for the value of cooperation between engineering managers and financial managers in NPD.