what is the aim when chosing an innovation project?
maximize risk and minimize reward
define capital rationing
companies deciding how to allocate capital among diff projects
r and d budgets ___
vary
discounted cash flows is a ____ method
quantitative
what is the arim of discounting cash flows
calculate the monetary reward for bearing risk of investment
define net present value
sum up discounted expected cash inflows and out flow
define time value of money
getting money now gives you current opportunities, there is risk of no money in future
define internal rate of return
discount rate when NPV =0
you find the irr through ______
trial and error
you can get multiple irr if ___
cash flows vary
what are the strengths of irr?
concrete estimates, considers timing and time value of money
what are the weaknesses of irr
Deceptive: only as accurate as your estimate
of initial cash flows, May fail to capture strategic / politically
important projects
when are quantitative methods useful?
when future outcomes are more certain (non-changing stable industries)
define real option
a contract to the right - but not the obligation to undertake a business decision in the future
define call option:
option to buy a certain quantity of goods by a future date for a given price
the price of the call option is the cost of ____
initial r and d program
define exercise price
cost of future investment
the value of stock is the __
returns
what are the limitations of the real options?
exercise date, value of the option is not independent of the investor- discovery
selling your own stuff is
least risky least complex financing
ipo and public markets are the
most risky most complex
what are a few screening questions?
role of customer? role of capabilities? project timing and cost?
r and d takes ____
time, originality, knowledge
