1. Firms use both quantitative and qualitative methods to evaluate innovation projects for funding, as most projects fail and resources are limited. Commonly used quantitative methods like net present value (NPV) and internal rate of return (IRR) create financial estimates but rely on uncertain cash flow forecasts. 2. Qualitative methods structure discussions around screening questions from multiple perspectives. Combination methods incorporate quantitative and qualitative data, like conjoint analysis quantifying attribute importance or data envelopment analysis ranking projects on efficiency. 3. No single method is perfect, so firms balance quantitative financial analysis with qualitative strategic fit assessments in choosing the right innovation project portfolio.

2. Developing innovative new products and services is expensive and time-consuming. It is also extremely risky—
most studies have indicated that the vast majority of development projects fail. Firms have to make difficult
choices about which projects are worth the investment, and then they have to make sure those projects are pursued
with a rigorous and well-thought-out development process. In this chapter, we will explore the various methods
used to evaluate and choose innovation projects. The methods range from informal to highly structured, and from
entirely qualitative to strictly quantitative. We will start by considering the role of capital rationing in the R&D
investment decision, and then we will cover various methods used to evaluate projects including strictly
quantitative methods, qualitative methods, and approaches that combine quantitative and qualitative techniques.

3.  1. Discounted Cash Flow Methods
 Many firms use some form of discounted cash flow analysis to evaluate projects. Discounted cash flows are quantitative methods
for assessing whether the anticipated
future benefits are large enough to justify expenditure, given the risks. Discounted cash flow methods take into account the payback
period, risk, and time value of money
2. Net Present Value (NPV)
the cash flows the project will yield (often under a number of different “what if” scenarios). Costs and cash flows that occur in the
future must be discounted back to the current period to account for risk and the time value of money.
3. Internal Rate of Return (IRR)
The internal rate of return of a project is the discount rate that makes the net present value of the investment zero
4. Real Options
When a firm develops new core technologies, it is simultaneously investing in its own learning and in the development of new
capabilities
QUANTITATIVE METHODS FOR CHOOSING PROJECTS

4. Quantitative methods for analyzing potential
innovation projects can provide concrete financial
estimates that facilitate strategic planning and trade-off
decisions. They can explicitly consider the timing of
investment and cash flows and the time value of
money and risk.
They can make the returns of the
project seem unambiguous, and
managers may find them very
reassuring. However, this
minimization of ambiguity may be
deceptive; discounted cash flow
estimates are only as accurate as the
original estimates of the profits from
the technology, and in many
situations, it is extremely difficult to
anticipate the returns of the
technology.

5. .
1. Conjoint Analysis
is a family of techniques (including discrete choice, choice modeling, hierarchical choice, trade-off matrices,
and pairwise comparisons) used to estimate the specific value individuals place on some attribute of a
choice, such as the relative value of features of a product or the relative importance of different outcomes of
a development Project
2. Data Envelopment Analysis
is a method of assessing a potential project (or other decision) using multiple criteria that may have different
kinds of measurement units.23 For instance, for a particular set of potential projects, a firm might have cash
flow estimates, a ranking of the project’s fit with existing competencies,
a ranking of the project’s potential for building desired future competencies, a score for its technical
feasibility, and a score for its customer desirability

6. 1. Firms often use a combination of quantitative and qualitative methods to evaluate
which projects should be funded. Though some methods assume that all valuable
projects will be funded, resources are typically constrained and firms must use
capital rationing.
2. The most commonly used quantitative methods of evaluating projects are discounted
cash flow methods such as net present value (NPV) or internal rate of return (IRR).
While both methods enable the firm to create concrete estimates of
returns of a project and account for the time value of money, the results are only as good
as the cash flow estimates used in the analysis (which are often unreliable). Both
methods also tend to heavily discount long-term or risky projects, and can
undervalue projects that have strategic implications that are not well reflected by cash
flow estimates.
3. Some firms now use a real options approach to assessing projects. Real options better
account for the long-run strategic implications of a project. Unfortunately, many new
product development investment decisions do not conform to the
assumptions inherent in an options valuation approach

7. 4. One commonly used qualitative method of assessing development projects is to subject the project to a series of
screening questions that consider the project from multiple angles. These questions may be used merely to structure
the discussion of a project or to create rating scales that are then utilized in an approach that combines qualitative and
quantitative assessment.
5. A company’s portfolio of projects typically includes projects of different types (e.g., advanced R&D, breakthrough,
platform, and derivative projects) that have different resource requirements and different rates of return. Companies
can use a project map to assess what their balance of projects is (or should be) and allocate resources accordingly.
6. Q-sort is a qualitative method of assessing projects whereby individuals rank each project under consideration
according to a series of criteria. Q-sort is most commonly used to provide a format for discussion and debate.
7. Conjoint analysis is a method of converting qualitative assessments of a choice into quantitative weights of the
different criteria underlying the choice. It is most often used for assessing how customers value different product
attributes.
8. Data envelopment analysis (DEA) is another method that combines qualitative and quantitative measures. DEA
enables projects that have multiple criteria in different measurement units to be ranked by comparing them to a
hypothetical efficiency frontier.