7 8 9 10 11 228000 228000 228000 228000 0 383845 383845 383845 383845 0 611845

7 8 9 10 11 228000 228000 228000 228000 0 383845

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7 8 9 10 11 $228,000 $228,000 $228,000 $228,000 $0 $383,845 $383,845 $383,845 $383,845 $0 $611,845 $611,845 $611,845 $611,845 $0 $26,200 $26,200 $26,240 $26,200 $13,120 $10,480 $10,480 $10,496 $10,480 $5,248 $601,365 $601,365 $601,349 $601,365 ($5,248) 0.45235 0.40388 0.36061 0.32197 0.28748 $272,027 $242,881 $216,853 $193,624 ($1,509) $240,000 $240,000 $240,000 $240,000 $0 $78,600 $78,600 $78,720 $78,600 $39,360
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$31,440 $31,440 $31,488 $31,440 $15,744 $208,560 $208,560 $208,512 $208,560 ($15,744) 0.45235 0.40388 0.36061 0.32197 0.28748 $94,342 $84,234 $75,192 $67,151 ($4,526)
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Pr. 12-60: Research Assignment, Strategy Background Obtain from your library a copy of the following article: Clayton M. Christen Stephen P. Kaufman, and Willy C. Shih, "Innovation Killers: How Financial 2008), pp. 98-105. The article focuses on bias agains innovation that is attributable to the misuse of certain financial tools. In fact, they conclude (page 104) that "managers in established corporations use analytical meth that make innovation extremely difficult to justify." The authors point to the three "misguided applications" of financial tools: (1) discounted cash flow ( net present value (NPV) to evaluate investment opportunities causes mana underestimate the real returns and benefits of proceeding with investments (2) The way that fixed and sunk costs are considered when evaluating futu confers an unfair advantage on challengers and shackles incumbent firms to respond to an attack. (3) The emphasis on earnings per share as the pri of share price and hence of shareholder value-creation, to the exclusion of everything else, diverts resources away from investments whose payoff lie immediate horizon. Required 1. According to the authors of the article, how does the use of DCF tools b in practice bias against innovation? What solution do the authors propo this problem? 2. Define the term "fixed costs" and "sunk costs." According to the authors article, what is the bias against innovation that is created by how some view such costs? What remedies do the authors recommend for dealing problem? 3. The authors suggest that bias in the evaluation of innovation projects is as well, by an overemphasis on (short-term) earnings per share statistic is the essence of this argument? What do the authors propose as a rec for addressing this problem? Solution 1. While not disputing the underlying mathematics of the discounting proces heart of DCF methods such as NPV, the authors assert two implementati part of decision-makers: Destroy Your Capacity to Do New Things," Harvard Business Review (Jana
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(1) The "DCF Trap": some analysts (erroneously) assume a status quo co position in their analyis of an investment project. That is, they extrapo market share and profitability of the company, without recognizing the erosion of both over time as competitors invest. As the authors state, competitors' sustaining and disruptive investments over time result in pressure, technology changes, market share losses, sales-volume de declining stock price." In short, standing still means you're falling beh lying logic has also been referred to as "Parmenides' Fallacy." The authors suggest, therefore, that a relative analysis be used when term investment projects. That is, in evaluating such projects manage evaluate a project relative to what would be the expected condition fo absence of the proposed investment. This is a crucial question. Answ entails assessing the projected value of the innovation against a rang most realistic of which is often a deteriorating competive and financia (2) Errors of estimation. The authors assert that in practice many manage
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