Single version for Modeler

The company should decide the single version and its pricing based on the net cash flows generated

The following assumptions are taken into account:

 Cash flow mentioned in the question is treated as Free cash flow (FCF)
 Demand is assumed to step function, i.e., remains constant for a particular segment
irrespective of the price offered
 Product development costs for each version are treated as sunk costs.

Steps to calculate the cash flow for each version:

 Sort the segments by their willingness to pay (W.T.P)

 The segment with the higher willingness to pay will buy the product at a lower price offered
to the other segments, so segments are clubbed as a single category based on their W.T.P.
Accordingly demand is calculated for these new categories
 Contribution margin per unit for each of the category is given by offered price - variable cost
 Total Contribution is calculated as a Unit contribution margin multiplied by demanding fewer
development costs
 Calculate the cash flow by deducting the capital expenditures incurred, i.e., product
completion cost

Summary of cash flows for each version

Net Cash
Total
Optimal Flow
Version Segments Contribution
Price Generated in
in $
$
Consultants and professional
companies,Small businesses, Large,
Student $50 multidivisional corporations,
Corporate R&D and university,
Students 80,20,000 79,20,000

Large, multidivisional corporations,

Corporate R&D and university,
Commercial $225
Consultants and professional 77,50,000 75,50,000
companies,Small businesses

Large, multidivisional corporations,

Corporate R&D and university,
Industry $600
Consultants and professional 1,48,05,000 1,43,05,000
companies

The company should offer “Industrial” version in the single-version case.

They should offer it at $600 and target Large Corporations, Corporate R&D, consultants, and
professional companies
Intermediate calculations are shown in the attached excel sheet

Cambridge Software
Corporation_Q1.xlsx