From: Peter VanDerWal <[EMAIL PROTECTED]> Subject: EV1 economics (was Re: No more Ford Th!nk EV) > > Let's assume I spend $1 million on R&D. Bye-bye, the money is spent and > gone. Now let's say that R&D has developed a product that will cost me > $1 million per year to manufacture (total costs) and will return > $1,000,010 per year. Do I go into production? Well yes, from a purely > economic point of view that's $10 profit. Does the $1 million I spend > on R&D have any effect on that profit? Nope. Do I not go into > production because it's such a small profit? Perhaps, but that's a > person call and not an economic one, after all I'd be throwing away $10 > a year.
You must have studied different economics texts than I. Given a universe of potential investments, of which your projected $10 return on a million dollar investment is just one, classic economic theory suggests that the "proper" algorithm is to rank all of the potential investments and to select the subset which provides the best rate of return. Unless you have infinite capital, the $10 return on a million dollar investment is likely to be at the bottom of the heap (with infinite capital, it's not a great idea, but you get to the bottom of the list before running out of capital ;>). > Any and all costs spent in the past have zero bearing on whether or not > a project is economically viable from this point forward. To an economist yes. To an accountant no. Given the twisted tax laws in most countries, it may well be the case that a strategic time to take a loss and a "write down" may be more valuable than a high capital investment with a low rate of return. > Because this is a free country. I'm intitled to my opinions. Indeed. Absolutely. Including the right to make up your own spellings ;> -- Keith H. Bierman [EMAIL PROTECTED]| Sun Microsystems Laboratories | [EMAIL PROTECTED] 15 Network Circle UMPK 15-224 | 650-352-4432 voice+fax Menlo Park, California 94025 | sun internal 68207 <speaking for myself, not Sun*> Copyright 2002
