1. The document discusses quantitative methods for choosing innovation projects, including discounted cash flow methods like net present value (NPV) and internal rate of return (IRR).
2. While quantitative methods allow for mathematical comparisons of projects, the accuracy of estimates used can be questionable, particularly in uncertain environments.
3. The document cautions that quantitative methods can undervalue development projects' long term contributions, citing Intel's investment in DRAM technology as an example.
Post-crisis investing: How global investors employ new modelsInduStreams
All sectors have been hit by the global economic crisis. In this presentation we take a look at infrastructure investors, more specifically sea port investors, to see how the best in the market are changing the way they invest. For more please go to www.port-investor.com.
Post-crisis investing: How global investors employ new modelsInduStreams
All sectors have been hit by the global economic crisis. In this presentation we take a look at infrastructure investors, more specifically sea port investors, to see how the best in the market are changing the way they invest. For more please go to www.port-investor.com.
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.
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).
1RUNNING HEAD Genesis Energy Capital Plan Report2Genesi.docxeugeniadean34240
1
RUNNING HEAD: Genesis Energy Capital Plan Report
2
Genesis Energy Capital Plan Report
Genesis Energy Capital Plan Report
Module 5 Assignment 2
Argosy University Online
Katrina Caver
The decision on capital outlays is among the most significant a firm has to make. A decision to build a new plant or expand into a foreign market may influence the performance of the firm over the next ten years. The capital budgeting decision includes the planning of expenditures for a project with a life of at least one year and usually considerably longer. Capital budgeting assists with the decision making of how a firm should invest its capital.
Different capital budgeting alternatives that are used includes the payback period, which calculates the amount of time it will take before the cumulative net cash flows are equal to the initial cost of the investment (Argosy Online University, 2012); accounting rate of return (return on investment, An indicator of profitability that is measured by dividing the accounting net income by the amount invested (AccountingCoach, 2004-2015)); discounted payback period(examines the time that is required to cover the investment of the project considering the present value of all the cash inflows); net present value(measures the present value of all the cash inflow from the project and compare the same with the initial investment); profitability index(measures the present value of cash inflows at the required rate of cash inflows at the rate of return that is required to for the initial cash outflow for the investment. However, if the present value of cash inflows is positive, then the project is accepted; if the project is negative, then the project is not accepted.
Upon evaluating the capital budget, the outcomes include cost of debt at eight percent, cost of equity at ten percent, short-term interest rate at eight percent, long-term interest rate at nine percent, and long-term equity interest rate at ten percent. Operating projections for a project is utilized to establish a forecast for cash flows that would underpin calculations of net present value, internal rates of return, payback period, and other investment metrics. The purpose of forecasting cash flows is to capture the incremental effect of a proposed project. Each project’s cash flow forecasts does not include depreciation expenses and cost that would be incurred regardless of whether a given project was undertaken or not. High, medium, and low risks categories for each division were associated with a corresponding discount rate set by the capital budgeting committee in consultation with the corporate treasurer.
The weighted average cost of capital is another method to evaluate proposed projects and capital budgeting. By computing a weighted average, the company can decide the interest for every dollar that is invested. Cost of capital assist with the determination of the minimum rate of return a company is expected to make from the project. Wei.
Schneider, Arnold, (2012) Managerial Accounting, United States, .docxanhlodge
Schneider, Arnold, (2012) Managerial Accounting, United States, Bridgepoint Education Inc
The Evaluation Methods
The evaluation methods discussed here are:
1.
Present value methods (also called discounted cash-flow methods).
(a)
Net present value method (NPV).
(b)
Internal rate of return method (IRR).
2.
Payback period method.
3.
Accounting rate of return method.
Nearly all managerial accountants agree that methods using present value (Methods 1a and 1b) give the best assessment of long-terminvestments. Methods that do not involve the time value of money (Methods 2 and 3) have serious flaws; however, since they are commonlyused for investment evaluation, their strengths and weaknesses are discussed.
Net Present Value Method
The net present value (NPV) method includes the time value of money by using an interest rate that represents the desired rate of return or, atleast, sets a minimum acceptable rate of return. The decision rule is:
If the present value of incremental net cash inflows is greater than the incremental
investment net cash outflow, approve the project.
Using Tables 1 and 2 found at the end of this chapter, the net cash flows for each year are brought back (i.e., discounted) to Year 0 andsummed for all years. An interest rate must be specified. This rate is often viewed as the cost of funds needed to finance the project and is theminimum acceptable rate of return. To discount the cash flows, we use the interest rate and the years that the cash flows occur to obtain theappropriate present value factors from the present value tables. A portion of Table 1 appears below showing the present value factors (theshaded numbers), corresponding to an interest rate of 12 percent, for each year during the Clairmont Timepieces project's life.
Periods
(n)
1%
2%
4%
5%
6%
8%
10%
12%
14%
15%
16%
0
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1
0.990
0.980
0.962
0.952
0.943
0.926
0.909
0.893
0.877
0.870
0.862
2
0.980
0.961
0.925
0.907
0.890
0.857
0.826
0.797
0.769
0.756
0.743
3
0.971
0.942
0.889
0.864
0.840
0.794
0.751
0.712
0.675
0.658
0.641
4
0.961
0.924
0.855
0.823
0.792
0.735
0.683
0.636
0.592
0.572
0.552
5
0.951
0.906
0.822
0.784
0.747
0.681
0.621
0.567
0.519
0.497
0.476
6
0.942
0.888
0.790
0.746
0.705
0.630
0.564
0.507
0.456
0.432
0.410
7
0.933
0.871
0.760
0.711
0.665
0.583
0.513
0.452
0.400
0.376
0.354
8
0.923
0.853
0.731
0.677
0.627
0.540
0.467
0.404
0.351
0.327
0.305
9
0.914
0.837
0.703
0.645
0.592
0.500
0.424
0.361
0.308
0.284
0.263
10
0.905
0.820
0.676
0.614
0.558
0.463
0.386
0.322
0.270
0.247
0.227
These present value factors are used in Figure 10.2 to discount the yearly cash flows to their present values. In Figure 10.2, the net cashinvestment ($95,000) is subtracted from the sum of cash-inflow present values ($137,331). When the residual is positive, the project's rate ofreturn (ROR) is greater than the minimum acceptable ROR. If:
Present value of incremental net cash inflows ≥ Incremental investment cash outf.
Slide 1
8-1
Capital Budgeting
• Analysis of potential projects
• Long-term decisions
• Large expenditures
• Difficult/impossible to reverse
• Determines firm’s strategic direction
When a company is deciding whether to invest in a new project, large sums of money can be at stake. For
example, the Artic LNG project would build a pipeline from Alaska’s North Slope to allow natural gas to
be sent from the area. The cost of the pipeline and plant to clean the gas of impurities was expected to be
$45 to $65 billion. Decisions such as these long-term investments, with price tags in the billions, are
obviously major undertakings, and the risks and rewards must be carefully weighed. We called this the
capital budgeting decision. This module introduces you to the practice of capital budgeting. We will
consider a variety of techniques financial analysts and corporate executives routinely use for the capital
budgeting decisions.
1. Net Present Value (NPV)
2. Payback Period
3. Average Accounting Rate (AAR)
4. Internal Rate of Return (IRR) or Modified Internal Rate of Return (MIRR)
5. Profitability Index (PI)
Slide 2
8-2
• All cash flows considered?
• TVM considered?
• Risk-adjusted?
• Ability to rank projects?
• Indicates added value to the firm?
Good Decision Criteria
All things here are related to maximize the stock price. We need to ask ourselves the following
questions when evaluating capital budgeting decision rules:
Does the decision rule adjust for the time value of money?
Does the decision rule adjust for risk?
Does the decision rule provide information on whether we are creating value for the firm?
Slide 3
8-3
Net Present Value
• The difference between the market value of a
project and its cost
• How much value is created from undertaking
an investment?
Step 1: Estimate the expected future cash flows.
Step 2: Estimate the required return for projects of
this risk level.
Step 3: Find the present value of the cash flows and
subtract the initial investment to arrive at the Net
Present Value.
Net present value—the difference between the market value of an investment and its cost.
The NPV measures the increase in firm value, which is also the increase in the value of what the
shareholders own. Thus, making decisions with the NPV rule facilitates the achievement of our
goal – making decisions that will maximize shareholder wealth.
Slide 4
8-4
Net Present Value
Sum of the PVs of all cash flows
Initial cost often is CF0 and is an outflow.
NPV =∑
n
t = 0
CFt
(1 + R)t
NPV =∑
n
t = 1
CFt
(1 + R)t
- CF0
NOTE: t=0
Up to now, we’ve avoided cash flows at time t = 0, the summation begins with cash flow zero—
not one.
The PV of future cash flows is not NPV; rather, NPV is the amount remaining after offsetting the
PV of future cash flows with the initial cost. Thus, the NPV amount determines the incremental
value created by unde.
Equity Research on Spicejet with a buy recommendation and a target price of INR 133.34. The valuation was done on 6th June 2017. The market price on 6/6/2017 was INR 105.65.
6
Case 11
Czpö"
2,
Chicago Valve Company
Capital Budgeting
Directed
Although he was hired as a financial analyst after completing his MBA, Richard Houston's first
assignment at Chicago Valve was with the firm's marketing department. Historically, the major
focus of Chicago Valve's sales effort was on demonstrating the reliability and technological
superiority of the firm's product line. However, many of Chicago Valve's traditional customers
have embarked on cost-cutting programs in recent years. As a result, Chicago Valve's marketing
director asked Houston's boss, the financial VP, to lend Houston to marketing to help them
develop some analytical procedures that the sales force can use to demonstrate the financial
benefits of buying Chicago Valve's products.
Chicago Valve manufactures valve systems that are used in a wide variety of applications,
including sewage treatment systems, petroleum refining, and pipeline transmission. The complete
systems include sophisticated pumps, sensors, valves, and control units that continuously monitor
the flow rate and the pressure along a line and automatically adjust the pump to meet pre-setpressure specifications. Most of Chicago Valve's systems are made up of standard components,and most complete systems are priced from $100 000 to $250 000. Because of the somewhattechnical nature of the products, the majority of Chicago Valve's sales people have a backgroundin engineering.
As he began to think about his assignment, Houston quickly came to the conclusion that thebest way to "sell" a system to a cost-conscious customer would be to conduct a capital budgetinganalysis which would demonstrate the cost effectiveness of the system. Further, Houstonconcluded that the best way to begin was with an analysis for one of Chicago Valve's actualcustomers.
From discussions with the firm's sales people, Houston concluded that a proposed sale toLone Star Petroleum, Inc. was perfect to use as an illustration. Lone Star is considering thepurchase of one of Chicago Valve's standard petroleum valve systems, which costs $200,000,including taxes and delivery. It would cost Lone Star another $12,500 to install the equipment, andthis expense would be added to the invoice price of the equipment to determine the depreciablebasis of the system. A MACRS class-life of five years would be used, but the system has aneconomic life of eight years, and it will be used for that period. After eight years, the system willprobably be obsolete, so it will have a zero salvage value at that time. Current depreciation
allowances for 5-year class property are 0.20, 0.32, 0.19, 0.12, 0.11, and 0.06 in Years 1-6,
respectively.
This system would replace a valve system which has been used for about twenty years and
which has been fully depreciated. The costs for removing the current system are about equal to its
scrap value, so its current net market value is zero. The advantages of the new system are greater
reliability and lower human mon.
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.
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).
1RUNNING HEAD Genesis Energy Capital Plan Report2Genesi.docxeugeniadean34240
1
RUNNING HEAD: Genesis Energy Capital Plan Report
2
Genesis Energy Capital Plan Report
Genesis Energy Capital Plan Report
Module 5 Assignment 2
Argosy University Online
Katrina Caver
The decision on capital outlays is among the most significant a firm has to make. A decision to build a new plant or expand into a foreign market may influence the performance of the firm over the next ten years. The capital budgeting decision includes the planning of expenditures for a project with a life of at least one year and usually considerably longer. Capital budgeting assists with the decision making of how a firm should invest its capital.
Different capital budgeting alternatives that are used includes the payback period, which calculates the amount of time it will take before the cumulative net cash flows are equal to the initial cost of the investment (Argosy Online University, 2012); accounting rate of return (return on investment, An indicator of profitability that is measured by dividing the accounting net income by the amount invested (AccountingCoach, 2004-2015)); discounted payback period(examines the time that is required to cover the investment of the project considering the present value of all the cash inflows); net present value(measures the present value of all the cash inflow from the project and compare the same with the initial investment); profitability index(measures the present value of cash inflows at the required rate of cash inflows at the rate of return that is required to for the initial cash outflow for the investment. However, if the present value of cash inflows is positive, then the project is accepted; if the project is negative, then the project is not accepted.
Upon evaluating the capital budget, the outcomes include cost of debt at eight percent, cost of equity at ten percent, short-term interest rate at eight percent, long-term interest rate at nine percent, and long-term equity interest rate at ten percent. Operating projections for a project is utilized to establish a forecast for cash flows that would underpin calculations of net present value, internal rates of return, payback period, and other investment metrics. The purpose of forecasting cash flows is to capture the incremental effect of a proposed project. Each project’s cash flow forecasts does not include depreciation expenses and cost that would be incurred regardless of whether a given project was undertaken or not. High, medium, and low risks categories for each division were associated with a corresponding discount rate set by the capital budgeting committee in consultation with the corporate treasurer.
The weighted average cost of capital is another method to evaluate proposed projects and capital budgeting. By computing a weighted average, the company can decide the interest for every dollar that is invested. Cost of capital assist with the determination of the minimum rate of return a company is expected to make from the project. Wei.
Schneider, Arnold, (2012) Managerial Accounting, United States, .docxanhlodge
Schneider, Arnold, (2012) Managerial Accounting, United States, Bridgepoint Education Inc
The Evaluation Methods
The evaluation methods discussed here are:
1.
Present value methods (also called discounted cash-flow methods).
(a)
Net present value method (NPV).
(b)
Internal rate of return method (IRR).
2.
Payback period method.
3.
Accounting rate of return method.
Nearly all managerial accountants agree that methods using present value (Methods 1a and 1b) give the best assessment of long-terminvestments. Methods that do not involve the time value of money (Methods 2 and 3) have serious flaws; however, since they are commonlyused for investment evaluation, their strengths and weaknesses are discussed.
Net Present Value Method
The net present value (NPV) method includes the time value of money by using an interest rate that represents the desired rate of return or, atleast, sets a minimum acceptable rate of return. The decision rule is:
If the present value of incremental net cash inflows is greater than the incremental
investment net cash outflow, approve the project.
Using Tables 1 and 2 found at the end of this chapter, the net cash flows for each year are brought back (i.e., discounted) to Year 0 andsummed for all years. An interest rate must be specified. This rate is often viewed as the cost of funds needed to finance the project and is theminimum acceptable rate of return. To discount the cash flows, we use the interest rate and the years that the cash flows occur to obtain theappropriate present value factors from the present value tables. A portion of Table 1 appears below showing the present value factors (theshaded numbers), corresponding to an interest rate of 12 percent, for each year during the Clairmont Timepieces project's life.
Periods
(n)
1%
2%
4%
5%
6%
8%
10%
12%
14%
15%
16%
0
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1
0.990
0.980
0.962
0.952
0.943
0.926
0.909
0.893
0.877
0.870
0.862
2
0.980
0.961
0.925
0.907
0.890
0.857
0.826
0.797
0.769
0.756
0.743
3
0.971
0.942
0.889
0.864
0.840
0.794
0.751
0.712
0.675
0.658
0.641
4
0.961
0.924
0.855
0.823
0.792
0.735
0.683
0.636
0.592
0.572
0.552
5
0.951
0.906
0.822
0.784
0.747
0.681
0.621
0.567
0.519
0.497
0.476
6
0.942
0.888
0.790
0.746
0.705
0.630
0.564
0.507
0.456
0.432
0.410
7
0.933
0.871
0.760
0.711
0.665
0.583
0.513
0.452
0.400
0.376
0.354
8
0.923
0.853
0.731
0.677
0.627
0.540
0.467
0.404
0.351
0.327
0.305
9
0.914
0.837
0.703
0.645
0.592
0.500
0.424
0.361
0.308
0.284
0.263
10
0.905
0.820
0.676
0.614
0.558
0.463
0.386
0.322
0.270
0.247
0.227
These present value factors are used in Figure 10.2 to discount the yearly cash flows to their present values. In Figure 10.2, the net cashinvestment ($95,000) is subtracted from the sum of cash-inflow present values ($137,331). When the residual is positive, the project's rate ofreturn (ROR) is greater than the minimum acceptable ROR. If:
Present value of incremental net cash inflows ≥ Incremental investment cash outf.
Slide 1
8-1
Capital Budgeting
• Analysis of potential projects
• Long-term decisions
• Large expenditures
• Difficult/impossible to reverse
• Determines firm’s strategic direction
When a company is deciding whether to invest in a new project, large sums of money can be at stake. For
example, the Artic LNG project would build a pipeline from Alaska’s North Slope to allow natural gas to
be sent from the area. The cost of the pipeline and plant to clean the gas of impurities was expected to be
$45 to $65 billion. Decisions such as these long-term investments, with price tags in the billions, are
obviously major undertakings, and the risks and rewards must be carefully weighed. We called this the
capital budgeting decision. This module introduces you to the practice of capital budgeting. We will
consider a variety of techniques financial analysts and corporate executives routinely use for the capital
budgeting decisions.
1. Net Present Value (NPV)
2. Payback Period
3. Average Accounting Rate (AAR)
4. Internal Rate of Return (IRR) or Modified Internal Rate of Return (MIRR)
5. Profitability Index (PI)
Slide 2
8-2
• All cash flows considered?
• TVM considered?
• Risk-adjusted?
• Ability to rank projects?
• Indicates added value to the firm?
Good Decision Criteria
All things here are related to maximize the stock price. We need to ask ourselves the following
questions when evaluating capital budgeting decision rules:
Does the decision rule adjust for the time value of money?
Does the decision rule adjust for risk?
Does the decision rule provide information on whether we are creating value for the firm?
Slide 3
8-3
Net Present Value
• The difference between the market value of a
project and its cost
• How much value is created from undertaking
an investment?
Step 1: Estimate the expected future cash flows.
Step 2: Estimate the required return for projects of
this risk level.
Step 3: Find the present value of the cash flows and
subtract the initial investment to arrive at the Net
Present Value.
Net present value—the difference between the market value of an investment and its cost.
The NPV measures the increase in firm value, which is also the increase in the value of what the
shareholders own. Thus, making decisions with the NPV rule facilitates the achievement of our
goal – making decisions that will maximize shareholder wealth.
Slide 4
8-4
Net Present Value
Sum of the PVs of all cash flows
Initial cost often is CF0 and is an outflow.
NPV =∑
n
t = 0
CFt
(1 + R)t
NPV =∑
n
t = 1
CFt
(1 + R)t
- CF0
NOTE: t=0
Up to now, we’ve avoided cash flows at time t = 0, the summation begins with cash flow zero—
not one.
The PV of future cash flows is not NPV; rather, NPV is the amount remaining after offsetting the
PV of future cash flows with the initial cost. Thus, the NPV amount determines the incremental
value created by unde.
Equity Research on Spicejet with a buy recommendation and a target price of INR 133.34. The valuation was done on 6th June 2017. The market price on 6/6/2017 was INR 105.65.
6
Case 11
Czpö"
2,
Chicago Valve Company
Capital Budgeting
Directed
Although he was hired as a financial analyst after completing his MBA, Richard Houston's first
assignment at Chicago Valve was with the firm's marketing department. Historically, the major
focus of Chicago Valve's sales effort was on demonstrating the reliability and technological
superiority of the firm's product line. However, many of Chicago Valve's traditional customers
have embarked on cost-cutting programs in recent years. As a result, Chicago Valve's marketing
director asked Houston's boss, the financial VP, to lend Houston to marketing to help them
develop some analytical procedures that the sales force can use to demonstrate the financial
benefits of buying Chicago Valve's products.
Chicago Valve manufactures valve systems that are used in a wide variety of applications,
including sewage treatment systems, petroleum refining, and pipeline transmission. The complete
systems include sophisticated pumps, sensors, valves, and control units that continuously monitor
the flow rate and the pressure along a line and automatically adjust the pump to meet pre-setpressure specifications. Most of Chicago Valve's systems are made up of standard components,and most complete systems are priced from $100 000 to $250 000. Because of the somewhattechnical nature of the products, the majority of Chicago Valve's sales people have a backgroundin engineering.
As he began to think about his assignment, Houston quickly came to the conclusion that thebest way to "sell" a system to a cost-conscious customer would be to conduct a capital budgetinganalysis which would demonstrate the cost effectiveness of the system. Further, Houstonconcluded that the best way to begin was with an analysis for one of Chicago Valve's actualcustomers.
From discussions with the firm's sales people, Houston concluded that a proposed sale toLone Star Petroleum, Inc. was perfect to use as an illustration. Lone Star is considering thepurchase of one of Chicago Valve's standard petroleum valve systems, which costs $200,000,including taxes and delivery. It would cost Lone Star another $12,500 to install the equipment, andthis expense would be added to the invoice price of the equipment to determine the depreciablebasis of the system. A MACRS class-life of five years would be used, but the system has aneconomic life of eight years, and it will be used for that period. After eight years, the system willprobably be obsolete, so it will have a zero salvage value at that time. Current depreciation
allowances for 5-year class property are 0.20, 0.32, 0.19, 0.12, 0.11, and 0.06 in Years 1-6,
respectively.
This system would replace a valve system which has been used for about twenty years and
which has been fully depreciated. The costs for removing the current system are about equal to its
scrap value, so its current net market value is zero. The advantages of the new system are greater
reliability and lower human mon.
June 3, 2024 Anti-Semitism Letter Sent to MIT President Kornbluth and MIT Cor...Levi Shapiro
Letter from the Congress of the United States regarding Anti-Semitism sent June 3rd to MIT President Sally Kornbluth, MIT Corp Chair, Mark Gorenberg
Dear Dr. Kornbluth and Mr. Gorenberg,
The US House of Representatives is deeply concerned by ongoing and pervasive acts of antisemitic
harassment and intimidation at the Massachusetts Institute of Technology (MIT). Failing to act decisively to ensure a safe learning environment for all students would be a grave dereliction of your responsibilities as President of MIT and Chair of the MIT Corporation.
This Congress will not stand idly by and allow an environment hostile to Jewish students to persist. The House believes that your institution is in violation of Title VI of the Civil Rights Act, and the inability or
unwillingness to rectify this violation through action requires accountability.
Postsecondary education is a unique opportunity for students to learn and have their ideas and beliefs challenged. However, universities receiving hundreds of millions of federal funds annually have denied
students that opportunity and have been hijacked to become venues for the promotion of terrorism, antisemitic harassment and intimidation, unlawful encampments, and in some cases, assaults and riots.
The House of Representatives will not countenance the use of federal funds to indoctrinate students into hateful, antisemitic, anti-American supporters of terrorism. Investigations into campus antisemitism by the Committee on Education and the Workforce and the Committee on Ways and Means have been expanded into a Congress-wide probe across all relevant jurisdictions to address this national crisis. The undersigned Committees will conduct oversight into the use of federal funds at MIT and its learning environment under authorities granted to each Committee.
• The Committee on Education and the Workforce has been investigating your institution since December 7, 2023. The Committee has broad jurisdiction over postsecondary education, including its compliance with Title VI of the Civil Rights Act, campus safety concerns over disruptions to the learning environment, and the awarding of federal student aid under the Higher Education Act.
• The Committee on Oversight and Accountability is investigating the sources of funding and other support flowing to groups espousing pro-Hamas propaganda and engaged in antisemitic harassment and intimidation of students. The Committee on Oversight and Accountability is the principal oversight committee of the US House of Representatives and has broad authority to investigate “any matter” at “any time” under House Rule X.
• The Committee on Ways and Means has been investigating several universities since November 15, 2023, when the Committee held a hearing entitled From Ivory Towers to Dark Corners: Investigating the Nexus Between Antisemitism, Tax-Exempt Universities, and Terror Financing. The Committee followed the hearing with letters to those institutions on January 10, 202
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Personal development courses are widely available today, with each one promising life-changing outcomes. Tim Han’s Life Mastery Achievers (LMA) Course has drawn a lot of interest. In addition to offering my frank assessment of Success Insider’s LMA Course, this piece examines the course’s effects via a variety of Tim Han LMA course reviews and Success Insider comments.
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Choosing Innovation
Projects
The Mahindra Shaan: Gambling on a Radical Innovation
Mahindra Tractors, the Farm Equipment Sector of the Mahindra & Mahindra
Group in India is one of the world’s largest producers of tractors.a In the late
1990’s, over 20 percent of Indian’s gross domestic product came from
agriculture and nearly 70 percent of Indian workers were involved in
agriculture in some way. a large number of farmers had plots so small—
perhaps 1–3 hectares—that it was difficult to raise enough funds to buy any
tractor at all. Managers at Mahindra & Mahindra sensed that there might be
an opportunity for a new kind of tractor that better served this market.
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Top Ten Industries
(three digit SIC) by
R&D Intensity, 2013
Based on Compustat data for
North American publicly held
firms; only industries with
greater than ten or more publicly
listed firms were included. Data
for sales and R&D were
aggregated to the industry level
prior to calculating the industry-
level ratio to minimize the effect
of exceptionally large outliers for
firm-level RDI.
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Explain the table show 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 com- ponents) spend considerably more of their revenues on R&D than
other industries, on average. There is also considerable variation within each of the
industries in the amount that individual 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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Top 20 Global R&D
Spenders, 2013
Data from Compustat
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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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Discounted Cash Flow
Method
Many firms use some form of discounted cash flow analysis to evaluate
projects. Discounted cash flows are quantitative methods for assessing
whether the antici- pated 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 analy- sis for evaluating investment
decisions are net present value (NPV) and internal rate of return (IRR).
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Net Present Value (NPV)
net present value (NPV) The discounted cash inflows of a project minus the
discounted cash outflows. o 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” sce- narios). 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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Example of Present
Value of Future Cash
Flows
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Net Present Value (NPV)
the present value of the future cash flows (given a discount rate of 6%) is
$3,465.11. Thus, if the initial cost of the project were less than $3,465.11, the
net present value of the project is positive. If there are cash outflows for
multiple periods (as is common with most development projects), those cash
outflows would have to be discounted back to the current period. If the cash
inflows from the development project were expected to be the same each
year we can use the formula for calculating the present value of an annuity
instead of discounting each of the cash inflows individually. This is particularly
useful when cash inflows are expected for many years. The present value of C
dollars per period, for t periods, with discount rate r is given by the fol-
lowing formula:
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Net Present Value (NPV)
This amount can then be compared to the initial investment. If the cash flows
are expected in perpetuity (forever), then a simpler formula can be used:
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Discounted payback
period
discounted payback period The time required to break even on a project using discounted cash
flows. The present value of the costs and future cash flows can also be used to calculate the
discounted payback period (that is, the time required to break even on the project using discounted
cash flows). Suppose for the example above, the initial investment required was $2,000. Using the
discounted cash inflows, the cumulative discounted cash flows for each year are:
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Discounted payback
period
Thus, the investment will be paid back sometime between the end of year 2
and the end of year 3. The accumulated discounted cash flows by the end of
year 2 are $1,833.40, so we need to recover $166.60 in year 3. Since the
discounted cash flow expected for year 3 is $839.62, we will have to wait
$166.60/$839.61 < .20 of a year. Thus, the payback period is just over two
years and two months.
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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. Calculating the IRR of a project typi-
cally 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 typ- ical calculators or computer programs
will often simply report the first IRR that is found.
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Internal Rate of Return
(IRR)
Thus, standard discounted cash flow analysis has the potential to severely
undervalue a development project’s contribution to the firm. For example,
Intel’s investment in DRAM technology might have been consid- ered a total
loss by NPV methods (Intel exited the DRAM business after Japanese
competitors drove the price of DRAM to levels Intel could not match).
However, the investment in DRAM technology laid the foundation for Intel’s
ability to develop microprocessors—and this business has proved to be
enormously profitable for Intel.
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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. For example, Intel’s investment in DRAM technology
might have been considered a total loss by NPV methods (Intel exited the DRAM
business after Japanese competitors drove the price of DRAM to levels Intel could not
match). However, the investment in DRAM technology laid the foundation for Intel’s
ability to develop microprocessors—and this business has proved to be enor- mously
profitable for Intel.
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Qualitative methods for
choosing project
Most new product development projects require the evaluation of a
significant amount of qualitative information. Many factors in the choice of
development projects are extremely difficult to quantify, or quantification
could lead to misleading results. Almost all firms utilize some form of
qualitative assessment of potential projects, ranging from informal discussions
to highly structured approaches.
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Data Envelopment Analysis
data envelop- ment analysis (DEA) A method of ranking projects based on
multiple decision criteria by comparing them to a hypo- thetical efficiency
frontier. Data envelopment analysis (DEA) is a method of assessing a
potential project (or other decision) using multiple criteria that may have
different kinds of measure- ment units. 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 competen- cies, 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.
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Data Envelopment Analysis
For the latter two measures, projects were given a score of 1, 1.5, or 2.25
based on the group’s model for intellectual prop- erty and product market
benefits. These scores reflect this particular group’s scoring system—it would
be just as appropriate to use a scaled measure (e.g., 1 = very strong
intellectual property benefits, to 7 = no intellectual property benefits), or
other type of measure used by the firm. As shown, the DEA method enabled
Bell Laboratories to rank-order different projects, despite the fact that they
offered different kinds of benefits and risks.
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Summary of Chapter
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 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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Summary of Chapter
3. 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.
4. 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.
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