Financial Models for Evaluating Technology Investments

This chapter begins with the concept of research and development (R&D) as a necessary cost of business (Section 3.1). The financial models for evaluating R&D technology investments and implications of the firm’s technology strategies are introduced in Section 3.2. Section 3.3 provides a theoretical review to better understand the process of evaluating R&D project undertakings. This section also covers the R&D evaluation framework for evaluating staged R&D investments: ex-ante or prospective evaluation, ongoing or interim evaluation, and ex-post or retrospective evaluation. Section 3.4 discusses the method for valuing R&D using the option-pricing model. Given that the value of technology-based firms is mostly generated by intangible assets, the approaches used for evaluating intangible investments are reviewed in Section 3.5. This section also discusses the three main approaches for valuing intangible assets: market approach, cost approach, and income approach.