Deck 5: Selecting Innovation Projects

Question 1

Any innovation opportunity that generates a positive financial return is worth pursuing because it adds to the companies net worth.

Answer 1

False

Question 2

Fixed costs are costs that are independent of your level of production.

Answer 2

True

Question 3

Qualitative decision-making tools compare projects on the basis of scales or words.

Answer 3

True

Question 4

The first step in the analytical hierarchy process is to calculate the priority vectors for each dimension.

Question 5

The net present value estimates the rate of return on a project, given the level of expenditure and the timing and amount of cash inflows and outflows.

Question 6

At a 10 percent discount rate, a project that generates $1,000,000 a year for three years would have a net present value of $2,486,852.

Question 7

If you were to recalculate the net present value of a project with a higher discount rate, the resulting net present value would be higher.

Question 8

The internal rate of return is the discount rate that yields a net present value of zero.

Question 9

If the rate on U.S. treasury securities, with a term similar to your project is greater than the internal rate of return for the project, the project most likely should be undertaken.

Question 10

An advantage associated with discounted cash flow calculations is that they incorporate many important nonfinancial factors that influence decisions, such as the reaction of competitors, the relationship of one part of the business to another, or organizational learning.

Question 11

Options have positive value if the expected cash flow from making the investment is more than the value of maintaining the option.

Question 12

Real options help to maintain flexibility and avoid committing valuable resources to infeasible alternatives.

Question 13

In general, real-options analysis generates a larger value than discounted cash flow analysis if the magnitude of the outcome is large relative to the magnitude of the investment.

Question 14

Decision trees are a way to create a probability distribution of outcomes through the use of computer software that experiments with randomly selected values of inputs.

Question 15

Scenario analyses provide a visual representation of decisions and their effects on outcomes, costs and risks.

Question 16

When companies develop multiple products, they often use portfolio management tools to make decisions about innovation.

Question 17

Portfolio models take a wide variety of forms, including pie charts and bubble diagrams and are always based on quantitative data.

Question 18

A breakthrough project would be one with a high degree of process change and a low degree of product change.

Question 19

What type of uncertainty are companies facing when they need to choose between different innovation projects based on the value that can be captured from successful innovation?

A) technical uncertainty
B) financial uncertainty
C) market uncertainty
D) competitive uncertainty

Question 20

Which of the following is a way researches have identified as a strategic action to manage the uncertainty with innovation?

A) minimizing flexibility
B) seeking stable returns
C) reallocating uncertainty to others
D) maximizing investment

Question 21

As part of which strategic action should you minimize your investment in nonsalvageable assets?

A) seeking high returns
B) minimizing investment
C) maintaining flexibility
D) reallocating uncertainty to others

Question 22

As part of which strategic action should you begin your operations on a small scale?

A) seeking high returns
B) minimizing investment
C) maintaining flexibility
D) reallocating uncertainty to others

Question 23

What costs are independent of your level of production?

A) total costs
B) fixed costs
C) labor costs
D) variable costs

Question 24

What costs are dependent on the level of production of your good or service?

A) total costs
B) fixed costs
C) labor costs
D) variable costs

Question 25

Loan payments on a commercial building would be classified as which type of cost?

A) total costs
B) labor costs
C) fixed costs
D) variable costs

Question 26

Given the following information, what is the contribution margin per unit?
Salary     $200,000
Fixed costs     $100,000
Variable costs $     100 per item
Sales price $     150 per item

A) $50
B) $150
C) $6,000
D) $12,000

Question 27

Given the following information, what is the breakeven level of sales?
Salary     $200,000
Fixed costs $100,000
Variable costs     $ 100 per item
Sales price     $ 150 per item

A) 50
B) 150
C) 6,000
D) 12,000

Question 28

What type of decision-making tool compares projects on the basis of scales or words?

A) qualitative
B) quantitative
C) comparative
D) scoring

Question 29

What type of decision-making tool evaluates projects based on the basis of numerical calculations?

A) qualitative
B) quantitative
C) comparative
D) scoring

Question 30

What is the best explanation of comparative decision-making tools?

A) tools that compare projects on the basis of scales or words
B) tolls that evaluate projects based on the basis of numerical calculations
C) tools that pit projects against each other
D) tools that compare projects against standard scales

Question 31

What is the best explanation of scoring model?

A) tools that compare projects on the basis of scales or words
B) tolls that evaluate projects based on the basis of numerical calculations
C) tools that pit projects against each other
D) tools that compare projects against standard scales

Question 32

If you are evaluating projects on whether or not they meet specific criteria, what type of scoring model are you most likely using?

A) analytic hierarchy process
B) net present value
C) internal rate of return
D) checklist

Question 33

Which decision-making tool breaks a problem down into a series of different criteria and choices?

A) analytic hierarchy process
B) net present value
C) internal rate of return
D) checklist

Question 34

What decision-making tool starts with a decision maker making pair-wise comparisons of the importance of each dimension versus another on a scale of 0 to 10?

A) analytic hierarchy process
B) net present value
C) internal rate of return
D) checklist

Question 35

Given the following table of dimension weights, what is the priority vector for dimension A?
‪

A) .54
B) .60
C) 1.80
D) 2.67

Question 36

Given the following table of dimension weights, what is the priority vector for dimension B?
‪

A) .50
B) .36
C) 1.40
D) 1.00

Question 37

Given the following table of dimension weights, what is the most important dimension?
‪

A) A
B) B
C) C
D) can not tell from the information provided

Question 38

Given the following table of dimension weights, what is the least important dimension?
‪

A) A
B) B
C) C
D) can not tell from the information provided

Question 39

When using the analytical hierarchy process of decision making, what is the weighted average of each attribute called?

A) inconsistency ratio
B) priority vector
C) net present value
D) real option

Question 40

What quantitative method for evaluating innovative projects estimates the value of a project today given the amount and timing of cash outflows and inflows and the discount rate?

A) analytical hierarchy process
B) real options
C) net present value
D) internal rate of return

Question 41

What quantitative method for evaluating innovative projects estimates the rate of return on a project given the level of expenditure and the timing and amount of cash inflows and outflows?

A) analytical hierarchy process
B) real options
C) net present value
D) internal rate of return

Question 42

Given the following stream of cash flows assuming a current discount rate of 10 percent, what is the net present value of the project?

A) 1,000,000
B) 1,825,695
C) 2,137,980
D) 2,250,000

Question 43

Given the following stream of cash flows assuming a current discount rate of 5 percent, what is the net present value of the project?

A) 1,000,000
B) 1,877,443
C) 2,020,300
D) 2,250,000

Question 44

Given the following stream of cash flows assuming a current discount rate of 10 percent, if the initial investment were $1.8 million, what is the payback period?

A) 1 year
B) 2 years
C) 3 years
D) longer than 3 years

Question 45

When calculating the net present value of an innovative project and you decide to lower the discount rate, what would happen to the net present value?

A) it would increase
B) it would decrease
C) it wouldn't change
D) it's impossible to tell with the information provided

Question 46

What is the internal rate of return on the following income stream?

A) 5 percent
B) 10 percent
C) 15 percent
D) 20 percent

Question 47

Given the following income stream, if the rate of return on a three-year U.S. Treasury note was currently 5 percent, what decision would you make about the possible investment?

A) it would most likely be a poor investment
B) it would most likely be a good investment
C) it could be positive or negative
D) there is not enough information to be able to judge

Question 48

Which decision making tool that provides the right but not the obligation to make a future investment?

A) analytical hierarchy process
B) net present value
C) internal rate of return
D) real options

Question 49

Which decision-making tool limits decision making to information known at the stage at which the decision is being made?

A) analytical hierarchy process
B) net present value
C) real options
D) internal rate of return

Question 50

Which tool for making decisions about innovation projects provides a representation of investments under different assumptions about key factors that influence those investments?

A) analytical hierarchy process
B) net present value
C) real options
D) scenario analysis

Question 51

What decision-making tool provides a way to create a probability distribution of outcomes through the use of computer software that experiments with randomly selected values of inputs?

A) analytical hierarchy process
B) net present value
C) Monte Carlo simulation
D) decision trees

Question 52

What decision-making tool provides a visual representation of decisions and their effects on outcomes, cost, and risks?

A) analytical hierarchy process
B) internal rate of return
C) Monte Carlo simulation
D) decision trees

Question 53

Which decision-making tool provides a quantitative evaluation of a choice that is based on the value and probability of outcomes, and accounts for the influence of staged decision making on risk?

A) analytical hierarchy process
B) internal rate of return
C) Monte Carlo simulation
D) decision trees

Question 54

What is the most important portfolio management tool?

A) pie charts
B) project maps
C) bubble diagrams
D) bar charts

Question 55

Project maps show the placement of projects into what category?

A) derivative projects
B) platform projects
C) breakthrough projects
D) all of the above

Question 56

Which project map category would include efforts that extend existing projects?

A) derivative projects
B) platform projects
C) creative projects
D) breakthrough projects

Question 57

Which project map category would include efforts based on fundamentally new ideas?

A) derivative projects
B) platform projects
C) creative projects
D) breakthrough projects

Question 58

Which project map category would include efforts to create new product families?

A) derivative projects
B) platform projects
C) creative projects
D) breakthrough projects

Question 59

If you were looking to maximize profits form your R&D investments, in which area would you be most likely to allocate more resources?

A) derivative projects
B) platform projects
C) creative projects
D) breakthrough projects

Question 60

If you wanted to accelerate growth, in which area would you be most likely to allocate more resources?

A) derivative projects
B) platform projects
C) breakthrough projects
D) either platform or breakthrough projects

Question 61

Discuss the various strategic actions that can be undertaken to manage the uncertainty associated with innovation.

Question 62

Describe the various tools available to assist in making choices about innovation project.

Question 63

Explain the step required to conduct the analytic hierarchy process of decision making. Describe how the results from the process can be used to make an informed decision.

Question 64

Define and distinguish between net present value and the internal rate of return. What are some common problems associated with analyses based on discounted cash flows.

Question 65

Under what circumstances would a real-option analysis be preferable to a discounted cash flow analysis?

Question 66

Explain why companies need to manage product portfolios.