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Success in Innovation by Jan Verloop

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Appendix

Option Value

The simplest way to estimate the value of an innovation would be a Net Present Value (NPV) calculation with a discount factor that reflects the risk that the innovation project is deemed to have. For simple projects with a short development time, this approach for estimating the value might be adequate, but the method has its shortcomings. It treats all the cost and income figures with the same risks and thus implicitly assumes that nothing will or can be changed during the project. But there will be changes in the project and decisions can be made for reducing the risk of the innovation quest or adopting alternative business opportunities, and these factors should be taken into account.

A better way for estimating the value ...

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