Palisade Corporation Hippo Example Model

New Product Profitability

When a company develops a new product, the profitability of the product is highly uncertain. Simulation is an
excellent tool to estimate the average profitability and riskiness of new products. The following example
illustrates how simulation can be used to evaluate a new product. Imagine Pigco is thinking of marketing a new
drug used to make hippos healthier. The model below sets up the variables involved in marketing the new
product, such as market size, use of the drug, whether competitors enter the market, etc. @RISK distributions
(shown in green) are used to illustrate the uncertainty. We will make C27, the NPV of our 5 year profits, our
output cell. Analyzing the results of this output will help Pigco decide whether introducing the hippo drug would
be profitable or not.
This example was taken from Chapter 28 of Financial Models using Simulation and Optimization by Wayne Winston,
published by Palisade Corporation, where a detailed, step-by-step explanation can be found. It is also explained further in
the @RISK User's Guide

Price $ 2.20 Compet %age 0.2

Unit Var Cost $ 0.40 Year 1 Market Size 1000000
Interest Rate 0.1 Year 1 worst share 0.2
Entrant Prob 0.4 Year 1 most likely 0.4
Year 1 best share 0.7

Year 1 2 3 4 5
Market Size 1000000 #ADDIN? #ADDIN? #ADDIN? #ADDIN?
Use per hippo
Competitors #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
of our drug
(beginning of 0 #ADDIN? #ADDIN? #ADDIN? #ADDIN?
year)
Entrants #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
Unit Sales #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
Revenues #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
Costs #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
Profits #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?

NPV #ADDIN?

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