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Full download Strategic Management of Technological Innovation 4th Edition Schilling Test Bank all chapter 2024 pdf
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Chapter 07 - Choosing Innovation Projects
Chapter 07
Choosing Innovation Projects
True/False
1. The allocation of a finite quantity of resources over different possible uses is known as
research rationing.
Answer: False
Difficulty: Easy
Page: 130
Answer: False
Difficulty: Easy
Page: 130
3. Qualitative methods of analyzing new projects usually entail converting projects into
some estimate of future cash returns from a project.
Answer: False
Difficulty: Easy
Page: 131
4. Discounted cash flow methods typically do not take into account the payback period.
Answer: False
Difficulty: Easy
Page: 133
5. Upon calculation of its costs and cash inflows, if the net present value (NPV) of a
project is greater then zero then it generates wealth.
Answer: True
Difficulty: Easy
Page: 133-134
6. 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.
Answer: False
Difficulty: Easy
Page: 134
7-1
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
7. The discounted rate that makes the net present value of the investment maximize is
called the internal rate of return.
Answer: False
Difficulty: Easy
Page: 135
8. Discounted cash flow estimates of a project are only as accurate as the original
estimates of the profits from a technology.
Answer: True
Difficulty: Medium
Page: 135
9. Standard discounted cash flow analysis has the potential to severely undervalue a
development project’s contribution to the firm.
Answer: True
Difficulty: Medium
Page: 135
10. Calculating the internal rate of return of a project typically must be done by trial and
error.
Answer: True
Difficulty: Easy
Page: 135
11. 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.
Answer: False
Difficulty: Medium
Page: 136
12. 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.
Answer: True
Difficulty: Medium
Page: 137
13. While the value of a stock is independent of the call holder’s behavior, the value of an
R&D investment is not independent of the investor’s behavior.
7-2
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
Answer: True
Difficulty: Medium
Page: 138
Answer: True
Difficulty: Easy
Page: 138
Answer: True
Difficulty: Easy
Page: 140
16. Derivative projects offer fundamental improvements in the cost, quality, and
performance of a technology over preceding generations.
Answer: False
Difficulty: Easy
Page: 141
17. Ferguson TechnoWorks made the strategic decision to invest heavily in the
development of derivative projects. This is likely to make the returns on its R&D look
good only in the short run.
Answer: True
Difficulty: Hard
Page: 142
18. The most common use of conjoint analysis is to assess the relative importance of
different product attributes to customers.
Answer: True
Difficulty: Easy
Page: 143
Answer: True
Difficulty: Easy
Page: 145
7-3
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
20. The drawback to data envelopment analysis (DEA) is that it does not allow
comparisons of projects using multiple kinds of measures.
Answer: False
Difficulty: Easy
Page: 146
Multiple Choice
21. _____ refers to the allocation of a finite quantity of resources over different possible
uses.
a. Systematic allotment
b. Corporate funding
c. Organizational appropriation
d. Capital rationing
Answer: d
Difficulty: Easy
Page: 130
22. Which of the following is true of quantitative methods of analyzing new projects,
particularly in rapidly changing environments?
a. They enable managers to statistically compare projects.
b. Their accuracy is unquestionable.
c. Discounted cash flow methods and real options are the least recommended quantitative
methods.
d. They are particularly accurate in highly uncertain or rapidly changing environments.
Answer: a
Difficulty: Easy
Page: 131
23. FaxWork Inc. wishes to start manufacturing compact and portable fax machines.
Though the initial investments and the risks associated with the project are quite high, the
anticipated future benefits are high too. With which of the following quantitative methods
can FaxWork assess and evaluate the new project to justify the expenditure?
a. Q-sort
b. Screening
c. Discounted cash flow analysis
d. The project map
Answer: c
Difficulty: Medium
Page: 133
7-4
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
24. 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
Answer: b
Difficulty: Easy
Page: 133
25. 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: b
Difficulty: Easy
Page: 134
26. Which of the following is true of a project which has a present value of cash inflow of
$20,000 and the present value of the cash outflows of $15,000 (given the assumptions
made in calculating the costs and cash inflows)?
a. The project cannot be carried out as the outflow is high.
b. The net present value of the project is $35,000.
c. The project will require 5 years to break even.
d. The project generates wealth.
Answer: d
Difficulty: Medium
Page: 134
27. According to the net present value (NPV) method of evaluation of projects, if there
are cash outflows for multiple periods, then:
a. the NPV of the project will definitely be negative.
b. the NPV of the project will definitely be positive.
c. the discount rate will need to be altered.
d. those cash outflows will have to be discounted back to the current period.
Answer: d
Difficulty: Medium
Page: 134
7-5
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
28. Jupiter Systems is planning to develop a new telescope. The initial cost of the project
is estimated to be $600,000 with an anticipated recovery of $300,000, till perpetuity. The
payback period for this project is _____.
a. 6 months
b. 2 years
c. 4 years
d. 6 years
Answer: b
Difficulty: Medium
Page: 134–135
29. Henry calculated that the net present value of his investment would be zero with a 15
percent internal rate of return. This means that:
a. the project has no value.
b. Henry can compare the 15 percent internal rate of return to the required rate of return
to determine if the investment should be made.
c. the project requires an additional 15 percent investment by the company.
d. the project will break even in 15 years.
Answer: b
Difficulty: Medium
Page: 135
30. The internal rate of return of a project is the discount rate that:
a. adds the cash outflow to the current period.
b. reduces the cash outflow from the current period.
c. maximizes the net present value of the investment.
d. makes the net present value of the investment zero.
Answer: d
Difficulty: Easy
Page: 135
31. 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.
Answer: a
Difficulty: Medium
Page: 135
7-6
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
32. 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.
Answer: c
Difficulty: Medium
Page: 135
33. With respect to research and development, 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
Answer: b
Difficulty: Medium
Page: 136
34. 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.
Answer: a
Difficulty: Medium
Page: 136
35. What is the 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. A firm undertaking solo new product development does not require full investment in
the technology before determining if the technology will be successful.
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.
Answer: a
Difficulty: Medium
Page: 137
7-7
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
b. structure the discussion about project details like potential costs and benefits.
c. weed out illegal ideas.
d. choose the best consulting firm to analyze a potential project.
Answer: b
Difficulty: Easy
Page: 138
37. NewDigger Inc. makes backhoes for digging ditches and trenches. It has developed
an acid which when poured on the ground, digs trenches of various depths depending on
how much is applied. The firm has recently started using this product commercially. This
would probably be considered a(n) _____ project for NewDigger.
a. derivative
b. platform
c. breakthrough
d. advanced R&D
Answer: c
Difficulty: Medium
Page: 140-141
38. TechToTeach Co. developed and sold a product which 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 was widely
accepted by various universities and has been appreciated by students, thus increasing the
company’s inflow. This technology can be called a(n) _____ project by TechToTeach.
a. advanced R&D
b. platform
c. breakthrough
d. derivative
Answer: c
Difficulty: Medium
Page: 140-141
39. Coolers Inc. has developed a new generation of air conditioners. It upgraded the old
technology by making the air conditioners work on voice sensors instead of remote
controls. 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
Answer: a
Difficulty: Medium
7-8
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
Page: 141
Answer: c
Difficulty: Medium
Page: 142
Answer: d
Difficulty: Easy
Page: 142
42. 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 can be called a(n) _____ analysis.
a. attribute
b. functional
c. comparative
d. conjoint
Answer: d
Difficulty: Medium
Page: 143
7-9
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
Answer: b
Difficulty: Medium
Page: 143-145
Answer: d
Difficulty: Easy
Page: 143
45. 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
Answer: c
Difficulty: Easy
Page: 145
Essay
46. 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.
Answer: While large firms can fund innovation projects internally, new technology start-
ups must often obtain external financing. This can sometimes be daunting. Because
technology start-ups often have both an unproven technology and an unproven business
concept (and sometimes an unproven management team), they typically face a much
higher cost of capital than larger competitors, and their options for obtaining capital can
be very limited.
In the first few stages of start-up and growth, entrepreneurs may have to turn to friends,
family, and personal debt. Start-ups might also be able to obtain some initial funding
through government agencies. If the idea and the management team seem promising
enough, the entrepreneur can tap “angel investors” and venture capitalists as sources of
both funds and mentoring. Angel investors are private investors who fund projects
without utilizing a venture capital limited partnership structure. For projects that require
more than $1 million, entrepreneurs often turn to venture capital, either from independent
7-10
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
venture capital firms or corporate venture capital sources. The support of the venture
capitalist provides a number of valuable benefits including credibility among other
investors (and thus better access to capital) and mentoring.
Difficulty: Medium
Page: 132
47. What is the internal rate of return of a project? How is it calculated? What are the
drawbacks of using this method?
Answer: The internal rate of return (IRR) of a project is the discount rate that makes the
net present value of the investment zero. Managers can compare this rate of return to their
required return to decide if the investment should be made. Calculating the IRR of a
project typically must be done by trial and error, substituting progressively higher interest
rates into the net present value (NPV) equation until the NPV is driven down to zero.
Calculators and computers can perform this trial and error. This measure should be used
cautiously, however; if cash flows arrive in varying amounts per period, there can be
multiple rates of return, and typical calculators or computer programs will often simply
report the first IRR that is found.
Difficulty: Medium
Page: 135
48. Explain how the real options method using stock options. Are there any drawbacks to
this method?
Answer: To understand real options, it is first useful to consider the financial model upon
which they are based—stock options. In “real options,” the assets underlying the value of
the option are nonfinancial resources. An investor who makes an initial investment in
basic R&D or in breakthrough technologies is, it is argued, buying a real call option to
implement that technology later should it prove to be valuable. With respect to research
and development:
The cost of the R&D program can be considered the price of a call option.
The cost of future investment required to capitalize on the R&D program (such as the
cost of commercializing a new technology that is developed) can be considered the
exercise price.
The returns to the R&D investment are analogous to the value of a stock purchased with a
call option.
One drawback is the fact that technology investment scenarios often do not conform to
the same capital market assumptions upon which the approach is based. Furthermore,
while the value of a stock is independent of the call holder’s behavior (that is, the call
holder can simply wait and observe whether the value of the stock rises or falls), the
value of an R&D investment is not independent of the investor’s behavior.
Difficulty: Medium
Page: 136–138
7-11
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 07 - Choosing Innovation Projects
49. 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 weights and tradeoffs
for these types of services? Explain why you consider the technique to be most
appropriate.
Answer: A conjoint analysis technique would be the best choice for this analysis.
Conjoint analysis can estimate the specific value of features of the outpatient center. As a
part of the analysis, pricing for these services can also be determined. Multiple regression
can be used to assess the degree to which each service influences the overall rating,
resulting in the assignment of specific weights to individual criteria for different
configurations of the outpatient center. Although the Medical Center cannot please
everyone, it can come up with the “best” configuration for its patient base.
Difficulty: Medium
Page: 143
50. 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?
Answer: General Sys should use data envelopment analysis (DEA) to conduct its
evaluation. This method allows analysis of multiple criteria that have different kinds of
measurement units. In this case, measurement units include dollars (cash flows) and
rankings (focus group and consulting company). DEA uses linear programming to
combine these different measures to create a hypothetical efficiency frontier that
represents the best performance on each measure. These values can then be used to
compare this project with other projects.
Difficulty: Medium
Page: 143–146
7-12
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
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