Life-cycle budget

A life-cycle budget is an estimate of the total amount of sales and profits to be garnered from a product over its estimated life span. This estimate includes the costs to develop, market, and service a product. Thus, the time span covered is from the initiation of a product as a design concept through its estimated withdrawal from the market. Life-cycle budgets are useful for estimating the profits and cash flows associated with a project, and can be used in the decision of whether to invest in a product. A crucial element in this analysis is the estimation of the lifespan of a product, since managers tend to be overly optimistic and estimate a longer lifespan than is really the case, resulting in overestimated sales.

The concept can also be used to determine the investment level at different stages of a product's life. For example, investing additional funds in a more robust product can reduce the estimated cost of warranty claims and customer service later in the life of a product.

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Capital Budgeting