Chapter 07 Choosing Innovation Projects Answer Key
True / False Questions
1.
(p. 131)
The allocation of a finite quantity of resources over different possible uses is known as
research rationing.
Difficulty: 1 Easy
2.
(p. 131)
The ratio of R&D expenditures to sales is known as R&D trajectory.
Difficulty: 1 Easy
3.
(p. 136)
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.
Difficulty: 1 Easy
4.
(p. 137)
Both net present value and internal rate of return techniques provide concrete financial
estimates that facilitate strategic planning and trade-off decisions.
Difficulty: 1 Easy
5.
(p. 137)
Standard discounted cash flow analysis has the potential to severely undervalue a
development project's contribution to a firm.
Difficulty: 1 Easy
6.
(p. 137)
Calculating the internal rate of return of a project typically must be done by trial and error.
Difficulty: 1 Easy
7.
(p. 138)
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.
Difficulty: 1 Easy
8.
(p. 138)
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.
Difficulty: 1 Easy
9.
(p. 140)
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.
Difficulty: 1 Easy
10.
(p. 140)
The investor is an active driver of the value of an investment.
Difficulty: 1 Easy
11.
(p. 143)
Breakthrough projects involve development of products that incorporate revolutionary new
product and process technologies.
Difficulty: 1 Easy
12.
(p. 143-
144)
Derivative projects offer fundamental improvements in the cost, quality, and performance of a
technology over preceding generations.
Difficulty: 1 Easy
13.
(p. 145)
The most common use of conjoint analysis is to assess the relative importance of different
product attributes to customers.
Difficulty: 1 Easy
14.
(p. 148)
Data envelopment analysis (DEA) utilizes linear programming.
Difficulty: 1 Easy
15.
(p. 148)
The drawback to data envelopment analysis (DEA) is that it does not allow comparisons of
projects using multiple kinds of measures.
Difficulty: 1 Easy
Multiple Choice Questions
16.
(p. 131)
_____ refers to the allocation of a finite quantity of resources over different possible uses.
Difficulty: 1 Easy
17.
(p. 133)
Which of the following is true of quantitative methods of analyzing new projects, particularly
in rapidly changing environments?
Difficulty: 2 Medium
18.
(p. 133)
The discounted cash inflows of a project minus the discounted cash outflows is referred to as
the _____.
Difficulty: 1 Easy
19.
(p. 135)
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?
Difficulty: 2 Medium
20.
(p. 137)
If the net present value of a project is greater than zero, then the:
Difficulty: 2 Medium
21.
(p. 137)
Which of the following is true of the internal rate of return of a project?
Difficulty: 2 Medium
22.
(p. 137)
Which of the following is a disadvantage of using internal rate of return for assessing a
project?
Difficulty: 2 Medium
23.
(p. 138)
With respect to a research and development (R&D) program, which of the following can be
considered the exercise price?
Difficulty: 1 Easy
24.
(p. 138)
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:
Difficulty: 2 Medium
25.
(p. 138)
Which of the following is an advantage of using the real options approach of evaluating a
project?
Difficulty: 2 Medium
26.
(p. 138)
In the context of qualitative methods for choosing projects, screening questions are used
mainly to:
Difficulty: 2 Medium
27.
(p. 142-
143)
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.
Difficulty: 3 Hard
28.
(p. 142-
143)
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.
Difficulty: 3 Hard
29.
(p. 143-
144)
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.
Difficulty: 3 Hard
30.
(p. 144)
A firm that invests heavily in derivative projects that may be immediately commercialized with
little risk:
Difficulty: 2 Medium
31.
(p. 145)
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.
Difficulty: 1 Easy
32.
(p. 145)
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.
Difficulty: 2 Medium
33.
(p. 147-
148)
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?
Difficulty: 3 Hard
34.
(p. 145)
Which of the following statements is true of conjoint analysis?
Difficulty: 2 Medium
35.
(p. 148)
An efficiency frontier is the range of _____ that optimize a combination of features of a
potential project.
Difficulty: 1 Easy
Essay Questions
36.
Why do technology start-ups face a much higher cost of capital than larger competitors?
37.
(p. 137)
What is the internal rate of return of a project? How is it calculated? What are the drawbacks
of using this method?
38.
(p. 138)
Explain how the real options method uses stock options. Are there any drawbacks to this
method?
1. The cost of the R&D program can be considered the price of a call option.
2. The cost of future investment required to capitalize on the R&D program (such as the cost
3. The returns to the R&D investment are analogous to the value of a stock purchased with a
call option.
Difficulty: 2 Medium
39.
(p. 145)
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.
40.
(p. 147)
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?