Quiz 7: Choosing Innovation Projects

When Media Enterprises was faced with 5 different options for its research and development efforts,it looked at its budget and then ranked the projects to be funded.This is what is known as research rationing.

The ratio of R&D expenditures to sales is known as R&D concentration.

Qualitative methods of analyzing new projects usually entail converting projects into some estimate of future cash returns from a project.

Fred Stanley,a retired millionaire,invests in startup business projects that are under $1 million.Fred is an angel investor.

The Small Business Administration fosters entrepreneurship and innovation by administering grants,loans,and venture capital programs from different federal agencies.

The time required to break even on a project using discounted cash flows is known as period of return.

The internal rate of return will always give a precise solution to whether or not to invest.

Discounted cash flow estimates are only as accurate as the original estimates of profits,time,risk,and cost.

The internal rate of return of a project is the discount rate that minimizes the net present value of the investment.

Calculating the IRR of a project must be done by trial and error.

The value of a call stock option is zero as long as the price of the stock is more than the exercise price.

The real options approach is valuable when there is uncertainty and there is some evidence that it might work better than cash flow analysis for technology decisions.

From a real options perspective,the exercise price associated with commercializing a new technology would be the costs of manufacturing,marketing,and distributing the technology.

Many factors in the choice of development projects are quantifiable.

"Are there already appropriate suppliers and distribution channels?" is a screening question related to the role of capabilities.

Derivative projects offer fundamental improvements in the cost,quality,and performance of a technology over preceding generations.

Fredricks Technologies made the strategic decision to invest heavily in the development of derivative projects.This is likely to make its returns on R&D look good in the short run only.

The most common use of conjoint analysis is to assess the relative importance of different product attributes to customers.

Data envelopment analysis (DEA)utilizes linear programming.

The drawback to data envelopment analysis (DEA)is that it does not allow comparisons of projects using multiple kinds of measures.

_____ refers to the allocation of a finite quantity of resources over different possible uses. A) Systematic allotment B) Corporate funding C) Organizational appropriation D) Capital rationing

Using quantitative methods for choosing which R&D projects to pursue _____ in a rapidly changing environment. A) will lead to highly accurate results B) could lead to questionable results C) are the recommended methods D) is considered politically correct

When Ralph Ketner wanted to start the Food Lion grocery store business,he and his brother called 100 friends to each invest $1,000 in his business.This source had to be used probably because A) as a new business, the risk was high. B) banks are not allowed to lend to startups. C) it was the only legal way to proceed. D) selling stock is impossible for new startups.

Sheila Kessler is a retired millionaire who still likes to invest in new businesses and help other people get started in business.She would be called a(n) A) loan shark. B) angel investor. C) first generation mentor. D) venture investor.

Venture capitalists are most likely to provide funding A) if foreign companies are involved with the project. B) before a new business begins so they can have inputs. C) when there is only a small return on investment projected. D) after the new business has already begun operations rather than before it begins.

In trying to decide on whether or not to invest in a new project,the CEO of Foxeye Limited said she wanted to consider how long it takes to recover the investment,the risk,and the time value of money.It sounds like she should use A) real options. B) a portfolio analysis. C) Q-sort. D) a discounted cash flow method.

When Susie calculated the Net Present Value (NPV)of a project,the value came out to be -$2,000,0000.If this is the only information she has,Susie should recommend A) the project be accepted. B) the project be rejected. C) the NPV be recalculated using a higher discount rate. D) the NPV be recalculated using a lower discount rate.

According to the Net Present Value (NPV)method of evaluation of projects,if there are cash outflows for multiple periods A) only the cash outflows for the first five years will have to be discounted back to the current period. B) the NPV of the project will definitely be positive. C) the discount rate will need to be altered. D) those cash outflows will have to be discounted back to the current period.

Natal Technologies is developing a superior ultrasound machine for which it is required to invest $800,000.Based on the company's analysis,the product will generate $200,000 from the first year till perpetuity.According to this,the payback period is A) 10 years. B) 6 years. C) 3 months. D) 4 years.

Stan calculated that the net present value of his investment would be zero with a 15 percent internal rate of return.This means that A) the project has no value. B) 15 percent can be compared to the required rate of return to determine if the project should be accepted. C) the project requires an additional 15 percent investment on the part of the company. D) the project will pay back the investment in 15 years.

Discounted cash flow estimates are only accurate if A) calculations are made correctly. B) the original estimates of profits are accurate. C) management has instituted sufficient financial control systems. D) they are made in a timely fashion.

Using the real options approach,if the cost of future investments to capitalize on the R&D program is less than the returns from this investment,then A) the program should be abandoned. B) the program should be pursued. C) further calculations should be made. D) the exercise price should be determined.

Which of the following is analogous to the exercise price of stock options? A) The cost of the R&D program B) The cost of future investment required to capitalize on the R&D program C) The returns to the R&D investment D) The returns to the R&D investment minus the cost of the R&D program

If a firm has the option of investing in R&D,the cost of implementing the technology is the A) exercise price. B) nature of the option. C) benefit of exercising the option. D) the value of the option.

Screening questions are used mainly to A) involve people the decision. B) structure the discussion of project ideas. C) weed out illegal ideas. D) choose the best consulting firm to analyze a potential project.

Which of the following is an example of a distribution screening question for a new product? A) How will customers use the product? B) Is this project a platform that will lead to a family of new products? C) Where will the customer buy the product? D) How big is the market?

Ditch Witch makes backhoes for digging ditches and trenches.Recently it began a project to develop an acid which when poured on the ground digs trenches of various depths depending on how much is applied.This would probably be considered a(n)_____ project for Ditch Witch. A) derivative B) platform C) breakthrough D) insightful

The registrar's office at Mountain Home University plans to develop a computer software to allow both telephone and online course registration instead of in-person processing.Although this does not affect other departments directly,it is the next generation product for registration that would enable numerous other enhancements to be developed.This would likely be considered a(n)____ project. A) derivative B) platform C) breakthrough D) insightful

Mountain Home University developed a better teaching evaluation mechanism to use in its courses.This would likely be considered a(n)_____ project. A) derivative B) platform C) breakthrough D) insightful

Ditch Witch decided to put all its efforts into breakthrough projects to be on the leading edge of technology.This could result in A) poor returns on R&D in the short run followed by progressively increasing returns in the long run. B) poor returns overall on account of the high level of risk. C) good returns on R&D in the short run. D) short run profitability followed by decreasing profits.

As per the _____method,in order to establish scales of customer preferences individuals in a group are each given a stack of cards with an object or idea on each card. A) derivative B) conceptual C) DEA D) Q-sort

Steve was answering questions in a telephone survey and the surveyor asked him to rank how important different cell phone features were to him on a scale of 1 to 5.Apparently,_____ analysis is planned as part of the survey analysis. A) attribute B) functional C) comparative D) conjoint

Desco Consulting was asked by a client to evaluate the attractiveness of a potential project to develop a new product line.The data provided by the client included cash flow (in dollars),ranking of marketability by the sales force,and ranking of different product attributes from a potential customer focus group.It sounds like Desco should use _____ to do this evaluation. A) conjoint analysis B) data envelopment analysis C) attribute ranking D) break-even analysis

An efficiency frontier is the range of _____ that optimize a combination of features of a potential project. A) product features B) attribute arrangements C) hypothetical configurations D) conjoint dimensions

In DEA,_____ bear the responsibility of determining which measures are most important to include and of ensuring that the measures are accurate. A) financial heads B) team members C) certified experts D) managers

Advent Systems is a very successful medical instrument company.Recently the company was approached by a smaller company,New Pancreas,Inc.,that is developing and selling a device that acts as an artificial pancreas for diabetics.Explain how Advent might use the corporate venture capital structure to support this company and the reasons why it would do such a thing.

Explain why the cash flows (profits minus costs)for a project that are expected to continue for 20 years need to be discounted? Why not simply use the amounts as they are? Would it make a difference if 80 percent of the profits came in during the first 5 years?

Explain how the real options method could apply to R&D investments in a new project.Are there any drawbacks to this method?

Johnston Products has gathered data to evaluate the attractiveness of a potential project.It knows the cash flows expected under different scenarios.It has conducted a focus group that ranks various product attributes,and it has the ranking of various marketing techniques provided by a consulting company.What method should Johnston use to evaluate this project? Why is this method the best one to use?

Poduck Regional Medical Center has decided to build a new wing for its outpatient services.Poduck wants to know which services are important to its patients in this new wing.Do they prefer large waiting rooms for family members or small rooms adjacent to recovery rooms? Do they prefer patient advocates to keep them informed or would nurses be better? What technique would be appropriate to come up with weights and tradeoffs for these types of services? Explain why the technique you recommend is best.