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DCF Methods for Evaluating Investments

"It is impossible to use DCF methods for evaluating investments in research and development. There are no cost savings to measure, and we don't even know what products might come out of our R&D activities."

This is a quote from an R&D manager who was asked to justify investment in a major research project based on its expected net present value. How would you respond to this statement? Do you agree or disagree?

I need some guidence on this one. I believe it may be possible to use these methods but am having difficulty justifying it.

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The discounted cash flow method answers three important questions about the investment in R&D activities. First, it answers what is the value of the R&D investment today. Second, it provides an answer to the question, " what is the company's expected rate of return given the amount that is committed to the R&D and the project's financial projection? Third, the DCF method gives a reply to how much equity the company will receive from the project.


The concerns of the R&D manager:
We don't even know what ...

Solution Summary

This solution gives you a detailed discussion on DCF methods