18 Mar 2008

Valuing New Product Development

Recently, I made recommendations to a public company on how to improve its method of valuing its new product development projects. One of the areas we discussed was Options Analysis that I feel is a better method of financially evaluating technology new product development projects. I have embedded a slide show that demonstrates how NPV's assumptions can undervalue a new product's value. Options Analysis incorporates more realistic assumptions to more accurately value a project. Some things to keep in mind.
  1. The added reality increases the complexity of the model. Where NPV can be straightforward, Options Analysis requires you to conceptually understand how options work. I wouldn't recommend it for incremental innovations or low cost projects, but for major PD decisions I strongly feel this is the way to go.
  2. PD decisions are not completely made based on financial analysis. In fact studies have demonstrated that companies that solely relied on financial analysis to make investment decisions earn lower returns than companies that use a combination of financial and strategic tools.
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