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The Handbook of Technology and Innovation Management by Scott Shane

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7.2. Project Evaluation Models

Project evaluation models seek to determine the absolute or relative value of individual projects. Outputs from these models can be used to make go/no go decisions about particular projects or to rank projects against each other (Cooper et al., 2001). However, these models are of limited value in selecting project portfolios. Indeed, a portfolio constructed by selecting those projects valued most highly by a project evaluation model is almost certain to be suboptimal, because these models do not effectively account for interactions between projects. Nor do project evaluation models offer any insight into how resources should be allocated among the most attractive projects. Portfolio selection models, discussed in the subsequent section, seek to address these issues.

We divide project evaluation models into economic value models and scoring models. Economic value models estimate financial returns based on revenue and cost forecasts. They incorporate only factors with direct and quantifiable impact on financial outcomes. Relative value models evaluate projects by comparing them against fixed scales or other projects. In contrast to economic value models, relative value models can – and often do – include nonfinancial criteria. In the following sections, we describe both approaches in more detail.

7.2.1. Economic value models

Economic value models are probably the most popular R&D project selection methodology. According to a recent study, they are ...

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