This document discusses methods for choosing innovation projects. It explores quantitative and qualitative evaluation methods. Quantitative methods include discounted cash flow analysis using net present value (NPV) and internal rate of return (IRR) calculations. Many firms use capital rationing, setting a fixed R&D budget based on a percentage of previous sales. Qualitative factors are also important given uncertainty in forecasting new projects. Combining quantitative and qualitative techniques can provide a more holistic evaluation.
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
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
Project management is the practice of initiating, planning, executing, controlling, and closing the work of a team to achieve specific goals and meet specific success criteria at the specified time.
Most of the project idea involve combining existing field of technology or offering variants of present product & services.
A panel is formed for the purpose of identifying investment opportunities. It involves the following tasks which must be carried out in order to come up with a creative idea –
(a) SWOT analysis
(b) Determination of objectives
(c) Creating Good environment
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How to manage new product portfolios. Tools, criteria for selection, monitoring product development, resource allocation, innovation evaluation. Evaluating new products based on both individual merits AND macro-level company needs and priorities. Criteria for prioritizing projects, identifying stakeholders. Using computer simulations and modeling of product design alternatives to evaluate them, simulation methodology and criteria. Funneling process, new product development methodology.
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Real Option Approach to Evaluate Strategic Flexibility for Startup Projects, IIBA 2015, 360-368
Dmytro Shestakov
This article is devoted to investigation and evaluation of a startup project strategic flexibility depending on its available development options using real option approach. This approach combines ideas of corporate finance, real options and game theory and concludes to the Risk-Neutral Probability measure and the value of a Call Option that comes from Black-Scholes-Merton model. The findings enable us to estimate the value of managerial decisions, project flexibility and help entrepreneurs and investors to select the best choice of project strategic development.
A state of having limited knowledge where it is impossible to exactly estimate a future outcome is commonly called uncertainty and is measured as a set of possible states or outcomes where probabilities are assigned to each possible state or outcome. A measured state of uncertainty is called risk that can be both negative and positive, though it tends to be the negative side that companies commonly focus on. Sometimes, a company may have uncertainty without risk, but not risk without uncertainty. Generally, uncertainty is allied to scientific term “information” and emerges mostly in its incompleteness. Meanwhile, incompleteness of information is an integral part of any business process and project whether it is launching or developing.
28 MARCH – 02 APRIL, 2015
Ft. Lauderdale, Florida, USA
Co-Editors:
Prof. Dr. Cihan Cobanoglu
Prof. Dr. Serdar Ongan
Capital Rationing is the allocation of a finite quantity of a resource over different possible uses. Many firms use a form of capital rationing in formulating their new product development plans. Under capital rationing, the firm sets a fixed research and development budget (often some percentage of the previous year’s sales), and then uses a rank ordering of possible projects to determine which will be funded.
Capital Rationing is the allocation of a finite quantity of a resource over different possible uses. Many firms use a form of capital rationing in formulating their new product development plans. Under capital rationing, the firm sets a fixed research and development budget (often some percentage of the previous year’s sales), and then uses a rank ordering of possible projects to determine which will be funded.
Project management is the practice of initiating, planning, executing, controlling, and closing the work of a team to achieve specific goals and meet specific success criteria at the specified time.
Most of the project idea involve combining existing field of technology or offering variants of present product & services.
A panel is formed for the purpose of identifying investment opportunities. It involves the following tasks which must be carried out in order to come up with a creative idea –
(a) SWOT analysis
(b) Determination of objectives
(c) Creating Good environment
Application of Decision Analysis & Portfolio Management to the Generic Drug I...Richard Bayney
Shows how (a) well structured Decision Analysis can be applied to a major investment decision and (b) holistic Portfolio Management can lead to portfolio value maximization.
How to manage new product portfolios. Tools, criteria for selection, monitoring product development, resource allocation, innovation evaluation. Evaluating new products based on both individual merits AND macro-level company needs and priorities. Criteria for prioritizing projects, identifying stakeholders. Using computer simulations and modeling of product design alternatives to evaluate them, simulation methodology and criteria. Funneling process, new product development methodology.
INTERNATIONAL INTERDISCIPLINARY BUSINESS-ECONOMICS ADVANCEMENT CONFERENCE, II...Dmytro Shestakov
Real Option Approach to Evaluate Strategic Flexibility for Startup Projects, IIBA 2015, 360-368
Dmytro Shestakov
This article is devoted to investigation and evaluation of a startup project strategic flexibility depending on its available development options using real option approach. This approach combines ideas of corporate finance, real options and game theory and concludes to the Risk-Neutral Probability measure and the value of a Call Option that comes from Black-Scholes-Merton model. The findings enable us to estimate the value of managerial decisions, project flexibility and help entrepreneurs and investors to select the best choice of project strategic development.
A state of having limited knowledge where it is impossible to exactly estimate a future outcome is commonly called uncertainty and is measured as a set of possible states or outcomes where probabilities are assigned to each possible state or outcome. A measured state of uncertainty is called risk that can be both negative and positive, though it tends to be the negative side that companies commonly focus on. Sometimes, a company may have uncertainty without risk, but not risk without uncertainty. Generally, uncertainty is allied to scientific term “information” and emerges mostly in its incompleteness. Meanwhile, incompleteness of information is an integral part of any business process and project whether it is launching or developing.
28 MARCH – 02 APRIL, 2015
Ft. Lauderdale, Florida, USA
Co-Editors:
Prof. Dr. Cihan Cobanoglu
Prof. Dr. Serdar Ongan
Capital Rationing is the allocation of a finite quantity of a resource over different possible uses. Many firms use a form of capital rationing in formulating their new product development plans. Under capital rationing, the firm sets a fixed research and development budget (often some percentage of the previous year’s sales), and then uses a rank ordering of possible projects to determine which will be funded.
Capital Rationing is the allocation of a finite quantity of a resource over different possible uses. Many firms use a form of capital rationing in formulating their new product development plans. Under capital rationing, the firm sets a fixed research and development budget (often some percentage of the previous year’s sales), and then uses a rank ordering of possible projects to determine which will be funded.
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Schiling Chapter Seven : NPV and IRR
The two most commonly used forms of discounted cash flow analy- sis for evaluating investment decisions are net present value (NPV) and internal rate of return (IRR).
The most commonly used quantitative methods of evaluating projects are dis- counted 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.
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Memorandum Of Association Constitution of Company.pptseri bangash
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A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
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Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
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Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
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2. Overview
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.
CreatePPTBy:M.Razwan
3. THE DEVELOPMENT BUDGET
While many project valuation methods seem to assume that all
valuable projects will be funded, most firms face serious constraints in capital
and other resources, forcing them to choose between multiple valuable projects
(or obtain external financing as discussed in the Theory in Action section).
Many firms use a form of capital rationingmin formulating their new product
development plans. Under capital rationing, the firm sets a fixed research and
development budget (often some percentage of the previous year’s sales), and
then uses a rank ordering of possible projects to determine which will be
funded. Firms might establish this budget on the basis of industry benchmarks
or historical benchmarks of the firm’s own performance. To provide a sense of
what firms in different industries spend on R&D, Figure 7.1 shows the ten
industries with the highest R&D intensity (R&D expenditures as a percentage
of sales), based on North American publicly held firms in 2013. Some industries
(notably drugs, special industry machinery, and semiconductors and electronic
components) spend considerably more of their revenues on R&D than other
industries, on average.
CreatePPTBy:M.Razwan
5. THE DEVELOPMENT BUDGET
There is also considerable variation within each of the
industries in the amount thatbindividual firms spend. For example, as
shown in Figure 7.2, Roche Holding’s R&D intensity is significantly
higher than the average for drug producers (19% versus 16%), whereas
Pfizer’s is somewhat lower than the industry average (13% versus
16%). Figure 7.2 also reveals the impact of firm size on R&D budgets:
Whereas the absolute amount spent on R&D at Volkswagen surpasses
the R&D spend at other firms by a large amount, Volkswagen’s R&D
intensity is relatively low due its very large sales base.
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6. QUANTITATIVE METHODS FOR CHOOSING PROJECTS
Quantitative methods of analyzing new projects usually entail
converting projects into some estimate of future cash returns from a
project. Quantitative methods enable managers to use rigorous
mathematical and statistical comparisons of projects, though the quality
of the comparison is ultimately a function of the quality of the original
estimates. The accuracy of such estimates can be questionable—
particularly in highly uncertain or rapidly changing environments. The
most commonly used quantitative methods include discounted cash
flow methods and real options.
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7. 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. The two
most commonly used forms of discounted cash flow analysis for
evaluating investment decisions are net present value (NPV) and
internal rate of return (IRR). Both methods rely on the same basic
discounted cash flow mechanics, but they look at the problem from
different angles.
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8. Net Present Value (NPV)
To calculate the NPV of a project, managers first estimate the
costs of the project and 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. The present value of cash
inflows can then be compared to the present value of cash outflows:
NPV = Present value of cash inflow – Present value of cash outflows
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9. Net Present Value (NPV)
Example of Present Value of Future Cash Flows
10. 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. Managers can
compare this rate of return to their required return to decide if the
investment should be made. Calculating the IRR of a project typically
must be done by trial and error, substituting progressively higher
interest rates into the NPV equation until the NPV is driven down to
zero. Calculators and computers can perform this trial and error. This
measure should be used cautiously, however; if cash flows arrive in
varying amounts per period, there can be multiple rates of return, and
typical calculators or computer programs will often simply report the
first IRR that is found.
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11. Real Options
In “real options,” the assets underlying the value of the option
are nonfinancial resources.3 An investor who makes an initial
investment in basic R&D or in breakthrough technologies is, it is
argued, buying a real call option to implement that technology later
should it prove to be valuable.4 Figure provides examples of
investment decisions that can be viewed as real call options. With
respect to research and development:
The cost of the R&D program can be considered the price of a call
option.
The cost of future investment required to capitalize on the R&D
program (such as the cost of commercializing a new technology that
is developed) can be considered the exercise price.
The returns to the R&D investment are analogous to the value of a
stock purchased with a call option.5
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12. DISADVANTAGES OF QUANTITATIVE METHODS
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.
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