Deck 7: Choosing Innovation Projects

Question 1

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

Answer 1

True

Question 2

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

Answer 2

B

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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

Question 7

_____ refers to the allocation of a finite quantity of resources over different possible uses.

A) Systematic enrollment
B) Translational funding
C) Organizational appropriation
D) Capital rationing

Question 8

Breakthrough projects involve development of products that incorporate revolutionary new product and process technologies.

Question 9

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

Question 10

If the net present value of a project is greater than zero,then the:

A) project cannot be carried out as the cash outflow is too high.
B) present value of cash outflows is higher than present value of cash inflow.
C) project will require 5 years to break even.
D) project generates wealth.

Question 11

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

Question 12

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 13

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 14

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

Question 15

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

Question 16

Both net present value and internal rate of return techniques provide concrete financial estimates that facilitate strategic planning and trade-off decisions.

Question 17

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

A) They enable managers to use rigorous statistical comparisons of projects.
B) Their accuracy is unquestionable.
C) Discounted cash flow methods are the least commonly used quantitative methods.
D) They are particularly accurate in highly uncertain or rapidly changing environments.

Question 18

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

Question 19

Data envelopment analysis (DEA)utilizes linear programming.

Question 20

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 21

TechToTeach Co.has developed and sold a product that 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 has been widely accepted by various universities and has been appreciated by students,thus increasing the company's inflow.This technology can be most accurately described as a(n)_____ project by TechToTeach.

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

Question 22

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

Question 23

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 24

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 25

With respect to a research and development (R&D)program,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 26

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

Question 27

In the context of qualitative methods for choosing projects,screening questions are used mainly to:

A) increase the rate of employee attrition.
B) structure the discussion about project details like potential costs and benefits.
C) increase employee turnover rates.
D) choose the best consulting firm to analyze a potential project.

Question 28

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

Question 29

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 30

Which of the following is an 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) It is useful as technology investment scenarios often conform to the same capital market assumptions upon which the approach is based.
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 in technology trajectories.

Question 31

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) Breakeven analysis

Question 32

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

A) derivative
B) platform
C) breakthrough
D) additive

Question 33

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 the weights and trade-offs for these types of services? Explain why you consider the technique to be most appropriate.

Question 34

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 would most accurately be termed a _____ analysis.

A) figurative
B) translational
C) fictional
D) conjoint

Question 35

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 36

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 37

A firm that invests heavily in derivative projects that may be immediately commercialized with little risk:

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

Question 38

Which of the following statements is true of conjoint analysis?

A) It is a 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 requires 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 39

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 40

Coolers Inc.has developed a new generation of air conditioners.It has upgraded the old technology by making the air conditioners work on voice sensors instead of remote control.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