FINANCIAL VALUATIONS OF R&D PROJECTS

GROUP 5

NPV/DCF/IRR
PROS CONS

Established Standardized Ease of Implementation Low Cost Preferred by investors

Doesn't take unique risk into account Not accurate Not suitable for high risk- longer duration scenario

NET ASSET VALUE (NAV)

PROS CONS

Data easily available Suitable for heavy tangible investments Helpful when future is risky Helpful when earning period is brief and volatile

Underestimates value of intangibles Doesnt incorporate future changes

DECISION TREE WITH DCF

PROS CONS

Allows multiple decisions Allows uncertainties over time Easy to understand and Implement Helpful when earning period is brief and volatile

Decision trees can be complex Need to adjust discount rates for each period Choice of chance probabilities subjective

REAL OPTIONS
PROS CONS

Uses probabilities of success of trials into account Takes Unique risk into account Useful for high risklonger duration scenarios

Complex Not Standardized Not Transparent Assumption in determining affordability

(EV/(EBIT+R&D) , PRICE TO EARNINGS TO EARNINGS GROWTH (PEG)

PROS CONS

MULTIPLES

Incorporates both R&D growth and Earnings growth Useful when comparisons exist Relatively easy to understand

Identification of comparable is difficult May not cover all the risks Simplistic

QUESTIONS?