Research And Development Teams May Not Be Based On Financial Calculations

1.1. Review principles of estimating project cash flows. Suggested reading: Ch. 9 “Capital Budgeting and Cash Flow Analysis” in “Contemporary Financial Management”, 11th ed. by Moyer, McGuigan, and Kretlow.

Before moving forward to compute the present value of these cash flows, a terminal value is required to forecast the long term value of the company after 5 years. . Following formula is used to calculate the terminal value.

The relatively well posed project with promises of great future pay offs must be examined closely nevertheless to determine its true profitability. As such, the Super Project’s NPV must be calculated, however before we proceed we must acknowledge the relevant cash flows. The project incurred an expense of testing the market. This expense, however, must not be included in our cash flow analysis because it can be considered a sunk cost. This expense is required for ‘taking a temperature’ of the market and will not be recovered. Other sources of cash flow include:

On the figure above, we can see that the terminal value is used as the horizon in forecasting the three projects. We also have to consider the condition of when we should set the terminal value. The key to set the horizon is when the stable growth of forecasted cash flows begin. When the stable growth begins, stop forecasting the

Southwest traditionally uses a 5% premium over the weighted average cost of capital as a discount rate for long-term projects. This makes certain that the project will only have a positive net present value and be worth the investment if it gives investors a premium for the additional risk they must take on. The expected return on the project of 14.5% gives a 5.9% premium over the calculated

The present value of an outlay in perpetuity for a particular project can be calculated as follows:

Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.

Our approach to valuing the processing plant can easily be decomposed into three distinct steps first, find the value of the foreseeable free cash flows. Next, calculate the terminal value of the project. Finally, take the present value of those flows. The next few paragraphs walk through each of these steps in order of progression.

The Conch Republic is an organization which produces reputable electronics is seeking to advance one of their current production lines to stay abreast to changing technology. The company is seeking to introduce a new smart phone with the hopes of boosting the company’s revenue and reputation as a smart phone producer. As a person hired to assess the financial undertaking of Conch Republic an overview of the projects planned expense must be generated. However, in order to accomplish this task a capital investment analysis must be conducted in order to determine the projects viability. This will be done by analyzing several things. Those things that must be understood are the projects payback period, the net present value (NPV), internal

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

An intangible asset is an identifiable, non-monetary asset that has no physical presence. IAS 38 states that an intangible asset should be recognized initially at cost if some criteria are met such as the following:

Take for example the case of L'Oreal that hugely gives emphasis to its research and development. The company today is not only a manufacturing giant in cosmetics and allied products, but it is also a global leader with a fair share of the global market across sector of the industry. This shows that Research and Development have long-term benefits which are crucial for operational expertise, especially when it matter to manufacturing companies. According to scholars it is believed and speculated that "the longevity of benefits derived as a result on expenditure on Research and Development is incapable of measurement at the time the expenditure is incurred. (Thuronyi, 1998 , p. 645) That is to say, benefit when measured is incapable, since the tremendous level that Research and Development

To analyze the incentives and disincentives to invest in Research and Development (R&D) project we firstly have to clarify the concept of innovating a firm with the use of R&D project. R&D can be determined when the innovation management tasks meet the technology management tasks. It contains activities such as fundamental research and concept development. However, it does not include technology licensing, corporate venturing and innovation management. Thus, since firms want to grow by developing new products, they invest in R&D.

This project evaluates the discounted Net Present Value which shows the estimated cash flow. The cash flow forecast is for 10 year which incorporates International complexities as well as the cost of capital.

Most of the companies invest in new technologies when the existing versions can very well serve the purpose. Hence emphasis should be given to effectively managing and maintaining the existing technology rather than unnecessarily investing on more technology. IT can be replicated very easily and is subject to rapid deflation making it a bad investment. It is always better to wait rather than rush to buy a new technology since a better version is always available before the newly purchased one is ready to use. Also it is very difficult to turn temporary technological advantages to enduring positioning ones. Hence more emphasis should be given in fixing the vulnerabilities rather than investing on a soon to be outdated technology. I agree with Carr that the companies in order to achieve a better return should manage risks and costs meticulously rather than resorting to seeking aggressive advantage. Also we have indeed spent much more than necessary on IT that the available technology is much advanced than what is required in the most cases.