Deck 7: Choosing Innovation Projects

Question 1

Upon calculation of its costs and cash inflows,if the net present value (NPV) of a project is greater then zero then it generates wealth.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Discounted cash flow estimates of a project are only as accurate as the original estimates of the profits from a technology.

Answer 3

True

Question 4

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

Question 5

Discounted cash flow methods typically do not take into account the payback period.

Question 6

Calculating the internal rate of return of a project typically must be done by trial and error.

Question 7

According to the net present value method of discounted cash flow analysis,the time required to break even on a project using discounted cash flows is known as period of return.

Question 8

From a real options perspective,the value of a call stock option is zero as long as the price of the stock is more than the exercise price.

Question 9

The investor is an active driver of the value of the investment.

Question 10

While the value of a stock is independent of the call holder's behavior,the value of an R&D investment is not independent of the investor's behavior.

Question 11

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

Question 12

The discounted rate that makes the net present value of the investment maximize is called the internal rate of return.

Question 13

Breakthrough projects involve development of products that incorporate revolutionary new technologies in a commercialized application.

Question 14

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

Question 15

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

Question 16

Standard discounted cash flow analysis has the potential to severely undervalue a development project's contribution to the firm.

Question 17

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

Question 18

Data envelopment analysis (DEA) utilizes linear programming.

Question 19

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

Question 20

The allocation of a finite quantity of resources over different possible uses is known as research rationing.

Question 21

What is the advantage of using the real options approach of evaluating a project?

A) It results in better technology investment decisions than a cash flow analysis approach.
B) A firm undertaking solo new product development does not require full investment in the technology before determining if the technology will be successful.
C) It is cheap to use in case of a firm undertaking solo new product development.
D) It is valuable only when there is no uncertainty.

Question 22

NewDigger Inc.makes backhoes for digging ditches and trenches.It has developed an acid which when poured on the ground,digs trenches of various depths depending on how much is applied.The firm has recently started using this product commercially.This would probably be considered a(n) _____ project for NewDigger.

A) derivative
B) platform
C) breakthrough
D) advanced R&D

Question 23

_____ 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

Question 24

Which of the following is true of the internal rate of return of a project?

A) The discounted cash flow estimates are only as accurate as the original estimates of the profit.
B) It maximizes the net present value of the investment.
C) It neglects the timing of investment and cash flows.
D) It does not discriminate against projects that are long term or risky.

Question 25

FaxWork Inc.wishes to start manufacturing compact and portable fax machines.Though the initial investments and the risks associated with the project are quite high,the anticipated future benefits are high too.With which of the following quantitative methods can FaxWork assess and evaluate the new project to justify the expenditure?

A) Q-sort
B) Screening
C) Discounted cash flow analysis
D) The project map

Question 26

Henry 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) Henry can compare the 15 percent internal rate of return to the required rate of return to determine if the investment should be made.
C) the project requires an additional 15 percent investment by the company.
D) the project will break even in 15 years.

Question 27

TechToTeach Co.developed and sold a product which can be used by students to take faster notes in a classroom as the teacher speaks.The device automatically records the teacher's voice and converts it into a text format.This new technology was widely accepted by various universities and has been appreciated by students,thus increasing the company's inflow.This technology can be called a(n) _____ project by TechToTeach.

A) advanced R&D
B) platform
C) breakthrough
D) derivative

Question 28

Jupiter Systems is planning to develop a new telescope.The initial cost of the project is estimated to be $600,000 with an anticipated recovery of $300,000,till perpetuity.The payback period for this project is _____.

A) 6 months
B) 2 years
C) 4 years
D) 6 years

Question 29

Which of the following is true of quantitative methods of analyzing new projects,particularly in rapidly changing environments?

A) They enable managers to statistically compare projects.
B) Their accuracy is unquestionable.
C) Discounted cash flow methods and real options are the least recommended quantitative methods.
D) They are particularly accurate in highly uncertain or rapidly changing environments.

Question 30

What is the net present value (NPV) of a project if the present value of cash inflow is $10,000 and the present value of cash outflows is $5,000?

A) $2,000
B) $5,000
C) $10,000
D) $15,000

Question 31

The internal rate of return of a project is the discount rate that:

A) adds the cash outflow to the current period.
B) reduces the cash outflow from the current period.
C) maximizes the net present value of the investment.
D) makes the net present value of the investment zero.

Question 32

If a firm has the option of investing in R&D,the cost of commercializing a new technology that is developed can be considered the:

A) exercise price.
B) price of a call option.
C) benefit of exercising the option.
D) the value of the option.

Question 33

Which of the following is a disadvantage of using internal rate of return for assessing a project?

A) It fails to take into account the time value of money and risk.
B) It cannot be calculated by trial and error.
C) It discriminates heavily against long term and risky projects.
D) It fails to provide concrete financial estimates.

Question 34

The discounted cash inflows of a project minus the discounted cash outflows is referred to as the _____.

A) internal rate of return
B) net present value
C) real option
D) screening value

Question 35

According to the net present value (NPV) method of evaluation of projects,if there are cash outflows for multiple periods,then:

A) the NPV of the project will definitely be negative.
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.

Question 36

With respect to research and development,which of the following can be considered the exercise price?

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

Question 37

A firm that invests heavily in derivative projects:

A) will have greater long-term strategic momentum.
B) will be on the leading edge of technology.
C) will have good returns on its R&D investment in the short run.
D) will be able to compete easily when the market shifts to a newer technology.

Question 38

Which of the following is true of a project which has a present value of cash inflow of $20,000 and the present value of the cash outflows of $15,000 (given the assumptions made in calculating the costs and cash inflows)?

A) The project cannot be carried out as the outflow is high.
B) The net present value of the project is $35,000.
C) The project will require 5 years to break even.
D) The project generates wealth.

Question 39

Coolers Inc.has developed a new generation of air conditioners.It upgraded the old technology by making the air conditioners work on voice sensors instead of remote controls.Though the technology is new,Coolers has decided to introduce the product in the market at a low cost.This project is a(n) _____ project for Coolers Inc.

A) platform
B) derivative
C) breakthrough
D) advanced R&D

Question 40

Screening questions are used mainly to:

A) involve people in the decision.
B) structure the discussion about project details like potential costs and benefits.
C) weed out illegal ideas.
D) choose the best consulting firm to analyze a potential project.

Question 41

Explain how the real options method using stock options.Are there any drawbacks to this method?

Question 42

What is the internal rate of return of a project? How is it calculated? What are the drawbacks of using this method?

Question 43

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

Question 44

Why do technology start-ups face a much higher cost of capital than larger competitors? Discuss the sources from which new technology start-ups can obtain external financing.

Question 45

Dayton Regional Medical Center has decided to build a new wing for its outpatient services.Dayton 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 you consider the technique to be most appropriate.

Question 46

Fabmark Consultancy 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 estimates (in dollars),ranking of marketability by the sales force,and ranking of different product attributes from a potential customer focus group.Which of the following methods would allow Fabmark Consultancy to combine this information and analyze it?

A) Q-sort
B) Data envelopment analysis
C) Attribute ranking
D) Break-even analysis

Question 47

General Sys Inc.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 General Sys use to evaluate this project? Why is this method the best one to use?

Question 48

In a survey,Sam was asked to rank on a scale of 1 to 5 how important different cell phone features were to him.The result was then used by the surveying firm to assess the different attributes of the ranking.This survey can be called a(n) _____ analysis.

A) attribute
B) functional
C) comparative
D) conjoint

Question 49

Which of the following is true of conjoint analysis?

A) It is simple method for ranking objects or ideas on a number of different dimensions.
B) It is used by managers to compare their desired balance of projects with their actual balance of projects.
C) It involves the creation of a hypothetical efficiency frontier.
D) It is most commonly used to assess the relative importance to customers of different product attributes.

Question 50

In 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