ATHENA WEEK 2 - 1 Flashcards
Choosing INNOVATION PROJECTS follows 3 steps
- identify dimensions
- where are we on the utility curve of each dimension
- where should we invest our money and effort in (use matrix f.e.)
capital rationing
the allocation of finite quantity of resources over different possible uses
How does a firm decide which projects to fund under CAPITAL RATIONING?
They set a fixed R&D budget and uses a RANK ORDERING of possible projects to determine which ones will be funded.
Why is capital rationing especially challenging for startups?
Startups usually need to find EXTERNAL FUNDING, which is difficult because they face much higher costs of capital than large companies.
R&D intensity
the ratio of R&D expenditures to sales
is money worth more today or in the future?
today
there are quantitative and qualitative methods for choosing projects, what are the QUANTITATIVE METHODS?
- NPV
- IRR
- Discounted payback period
- Real options
Discounted cash flow analysis
quantitative methods for assessing whether the anticipated future benefits are large enough to justify expenditures, given the risks
discounted cash analysis flow take 3 things into account
- time value of money
- payback period
- risk
NPV
present value of future cash inflows - present value of cash outflows, if NVP > 0 then it is good
IRR
discount rate at which the NPV of a project becomes 0. IRR > RR (required return) is good.
discounted payback period
the time to break even on a project using discounted cash flows.
Why is the discounted payback period more accurate than the simple payback period?
it accounts for the time value of money
What is a key limitation of the DPP related to profit estimates?
is only as accurate as the original estimates of the project’s profits, and it is often extremely difficult to predict technology returns.
How does the DPP typically treat short-term vs. long-term or risky projects?
favors short-term investments and tends to ignore high-risk, high-reward projects.
How can the DPP undervalue important projects?
It can undervalue projects that bring long-term growth because it focuses on discounted cash flows, missing the potential of future gains.
real options
the application of stock option valuation methods to investments in nonfinancial assets (business projects, tech development, infrastructure investments)
disadvantage of quantitative methods
- don’t focus on long term or risky projects
- fail to capture the strategic importance
- can undervalue a project’s value to the firms
- it is hard to rely on numbers when the market does not exist yet.
there are 3 QUALITATIVE METHODS for choosing projects
- screening questions
- aggregate project planning framework
- q-sort
Qualitative method: screening questions
- Who are most likely the customers of the new product?
- Where will the customers buy the product?
- Does the new product leverage the firm’s core competencies or sources of sustainable competitive advantage?
“Does the new product leverage the firm’s core competencies or sources of sustainable competitive advantage?” is a relevant question for screening questions, why?
Does this new product make use of the things our company is really good at and does it build on what already gives us an edge over competitors?
do screening questions give you a concrete answer?
no
Why are screening questions valuable in project selection, despite not providing concrete answers?
They help the firm consider a wider range of STRATEGIC and MARKET FACTORS important for development decisions.
qualitative methods for projects: The aggregate project planning framework
To map a company’s R&D projects based on RISK, RESOURCE COMMITMENT, and TIMING OF CASH FLOWS, helping balance the project portfolio with strategic goals.
