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Considerations arising from technology based on project financing

Investors will be funded solely related projects technology if they are convinced it is in their interest (Narayanan: 2000). Investors can finance the efforts of the technology when These projects are negotiable. Narayanan cited four major financial considerations, project evaluation, intellectual capital, financing and Market Signaling.

1) Evaluation Project

As usual, all projects evolve with a number of steps, from beginning to end of the operation. For the lifecycle of a project, we refer to all activities in the early days of the sequence of operations or marketing Como mentioned. The funds needed for a project are small early and are highest during the implementation phase. The evaluation of the project refers to activities related to the estimation the economic value of a project or performance.

Many companies adopt the technology value or net present rate of return of capital budgeting. NPV (or VPN) is a standard method in financing the investment budget – Planning the long-term investments. Using the method of net present value of an investment project may be done if the present value of all cash inflows minus the present value of cash flows (which corresponds to the net present value) is higher zero.

The rate of return (IRR) is used by companies to decide whether to make investments long term. The IRR is defined as any discount rate that gives a net present value to zero, which in general that the expected return generated through investment. In general, if the IRR exceeds the estimated project cost of capital or hurdle rate, the project should be accepted, There are very occasional problems in the use of this rule.

As a tool for investment decision, the IRR calculated should not be used to evaluate each unique project, but only to decide whether one project worth investing in. In cases where a project has a total initial investment over a joint exclusive secondly, the first draft may have a lower IRR (expected return), but higher NPV (increase in shareholder wealth) and should therefore be accepted in the second project. A method called marginal IRR can be used to adapt the methodology of the IRR for this case.

The actuarial method can be used as usual for projects starting with a first positive cash flow, for example when a customer makes a deposit before building a specific machine, resulting in a single cash flow positive followed by a series of negative cash flow (+ – - – -). In this case the usual IRR decision rule must be reversed.

If there are multiple sign changes in the series of cash flows, for example, (- + – SHOOTING + -), there May be multiple for a single project if the decision rule TIR may be impossible to implement. Examples of such projects are opencast mines and power plants nuclear, where there is usually a cash outflow in the grand finale of the project.

In general, the IRR can be calculated by solving a polynomial. Sturm's theorem can be used to determine if the polynomial has a single real solution. Importantly, the IRR equation can not be solved analytically (in its overall shape), but only via iterations.

A critical issue is the actuarial method that is often misunderstood to convey the actual annual profitability of a investment. However, this is not the case because intermediate cash flows are almost never reinvested at the IRR of the project, and Therefore, the real rate of return (similar to what would have occurred for the shares or bank deposits) will almost certainly be lower. By Therefore, a measure called Modified Internal Rate of Return (TRIM) is used, which has an assumed reinvestment rate, usually equal the capital cost of the project.

A key contribution to this process is the interest rate or "discount rate" which is used to discount the future cash flows to their present values. If the discount rate equals the required rate of return for shareholders, all NPV> 0 means that the required performance has been exceeded, and shareholders expect an additional benefit with a present value equal to the VPN. Thus, if the corporate goal of maximizing shareholder wealth, managers must make all projects with an NPV> 0, or if two projects are mutually exclusive, choose the one with the most net positive current.

The assumptions underlying the method of discounted cash flows are more or less valued in the decisions of technology in both technology and markets are relatively mature. However, where either the technology or the market is at its early stage of development, assumptions underlying the discounted cash flows are severely violated. Consequently, many progressive companies to increase the flow of traditional methods with discount Other approaches, such as assessment Options recovery projects early.

In finance, the discounted cash flow (or DCF) approach describes a method to evaluate a project or an entire company. The DCF methods determine the present value of future cash flows by discounting them using the cost of capital. This is necessary because the cash flows in different periods can not be compared directly because most people prefer money sooner rather than later (in short: a dollar in hand today is worth more than a dollar can get some time in the future). The same logic applies to the difference between cash flow and some other uncertain or a bird is worth two in the bush. " Because the opportunity cost and risk over time.

DCF procedure involves three issues.

1. Estimates of future cash flows,
   1. b. the incorporation of taxes (taxes income as well as corporate taxes on personal income)
   2. c. determining the cost of capital.

Discounted cash flow is widely used in the financing of investments, property development and financial management firms.

Models of option pricing were very simple and incomplete until 1973, when Fischer Black and Myron Scholes published the model Assessment of Black-Scholes.

The Black-Scholes theory gives values for European put and call options on non-securities paying dividends. The main argument is that the operators could risklessly cover a long position in options with a short position in the population and to adjust continuous coverage ratio (Delta) as needed. Assuming that the stock price follows a random walk, using methods of stochastic calculus, the option price can be calculated when there is no benefit of arbitration. This price only depends on 5 factors: the current stock price, the price exercise, the interest rate without risk, time to maturity, and volatility of stock prices. Finally, the model has been adapted to be able to price options, stocks that pay dividends.

The availability of a good estimate of the theoretical price an option contributed to the explosion of options trading. Other models of option pricing have been developed for other markets and situations with similar arguments, assumptions and tools, including the Black model for options on contracts forward Monte Carlo methods and options binomial model.

(2) Intellectual Capital

Because the technology includes tacit knowledge, ie knowledge that is not integrated as physical assets, in high technology businesses, capital intellectual can be economically much more important than physical assets. Intellectual capital is a term with multiple definitions in different theories economy. Therefore, its definition can not be truly neutral is a discussion on the economy, "intangible". Ambiguous combinations of capital education and individual capital in productive enterprises are generally what is meant by this term, whereas because they used to refer to an asset whose performance is intellectual property.

Perhaps because its approach to the industry, the term "intellectual capital" is used mainly by theorists of information technology, research and innovation transfer of technology and other fields concerned primarily with established technology, standards, and venture capital. It is especially common in 1995-2000 as a proliferation of theories to explain the point of com boom "and high ratings.

During this period, there often the code and programmers provide a substantial premium when it is combined in new activities not audited. It is difficult to see how it differs from the growth of the tulip, however, when he was just as likely to place a high value for the combination apparently magic tulip bulbs, for example, which grew in pots

(3) Funding

Two fundamental problems involved in funding for technology projects, selection and moral hazard. The risk may be transferred to another person who is willing to tolerate – The speculator. Another way of dealing with risk is to use the insurance pooling. The idea is simple. If one person in 1,000 homes burn year, and each contributes to a general fund 1 / 1000, the value of your home, will have enough funds (excluding administrative costs and if houses are more expensive or less likely to burn the houses cheap) to reimburse those whose homes burned.

The size the insurance industry suggests that people are willing to pay to avoid risks. They pay and get nothing, if luck smiles on them, whereas if tragedy strikes, the balance point, because the insurance should pay the value lost in the disaster.

Due to changes in insurance costs of misfortune, and because people options depend on costs and benefits, insurance should change people's behavior. They should make less effort to avoid misfortune, and this change of behavior is called moral hazard. For example, if an accident costs a person $ 1,000 but the insurance pays $ 900, the insured has less reason to avoid the accident. If the accident costs the person $ 1000, but paid in 2000 $, You can not only have no reason to avoid the accident, but may have an incentive to locate.

Sometimes, moral hazard is dramatic. Encourages fire insurance fire insurance encourages automobile accident and disability insurance encourages dismemberment.

The problem of moral hazard also affects government programs that insure people against bad luck. A variety programs help people who suffer the misery of poverty. Aid to dependent children, help people who suffer the misfortune of having to raise children who can support financially. The unemployment benefit paid to people who suffer the misfortune of losing their jobs. Good food and public housing to help the poor. However, these programs also suffer from moral hazard problems. Raising children born out of wedlock, unemployment and poverty.

Moral hazard is the result of maximizing behavior. A person who weighs the costs and benefits of action and where the benefits outweigh the costs, take action. This does not mean that if a person has a secure building for $ 50,000, but only market value of $ 30,000, the owner will not necessarily make a fire. There may be costs of violating the moral code of one and get caught and recognized guilty of arson. But some people put in this situation is to find a way to set fire to the building because it is the cost of violating a code high morale and the possibility of being caught small, and others will pay less attention to fire safety. The hazard morale does not require that people intentionally causing unhappiness. If you just take fewer steps to avoid misfortune, it produces the same result.

The problem of moral hazard created problems for both private insurance and government. Private insurance is trying to keep the insured value of any misfortune less than the value of the insured person. It's about keeping buildings and cars insured for less than its real value. It also tends to be against the law to create the misery that is insured. Finally, if the moral hazard problem is too large, there will be no insurance coverage for disasters.

The government can and sometimes it takes a similar approach. You can give little to help those at risk and encourages people to enter the situation, but then provide little help for people in danger. As it develops a program to provide more assistance to people in distress, but also encourages people to endanger. If people are paid to be poor, some will be in misery. If people are paid to take children out of wedlock, some of them. If people pay to be unemployed, others will be unemployed. Therefore, government programs that work to ensure the citizens against a misfortune that the basic commitment that we can not escape. Intensify efforts to help the needy also increase the actions that are considered socially undesirable.

Industry Insurance also may face problems of signaling and control. People who buy insurance are often a better idea risks faced by insurance salespeople. People who know they face major risks likely to buy insurance for those who face small risks. Insurance companies seek to minimize the problem that only people with major risks that will buy your product is the problem of adverse selection, trying to measure risk and to adjust the prices they charge for that risk. Thus, corporate medical exams life insurance and deny policies to people with terminal illnesses and car insurance companies free more people with a conviction for impaired driving.

These problems are particularly acute for start-ups have to look outside for financing their activities. Consequently, activities are financed at different stages of development implementation of different funding sources. As sources of external finance injected into the operations of the company's shareholders were more May also demand a voice in company operations. Sometimes, the objectives of the provider Private capital may differ objectives of the employer In this case, the conflict between the two is very likely. The process of venture capital requires intense scrutiny now by the providers of the plan capital firms risk, the management team and the funding request. Venture capital is to mitigate the problems of adverse selection and moral hazard by through the initial audit, the terms of the agreement and controls are placed on continuous assessment of the implementation. (Narayanan: 2000)

The financing of technology projects in large companies is linked to the budgeting process. However, responsibility maintain the innovativeness of a company depends largely on the success of technology managers to influence the flow funds to appropriate projects.

(4) Market Signaling

In technology, signaling becomes an important mechanism by which managers of large companies can provide credible and economically relevant to outside investors in determining the value of the company.

The three environmental trends – globalization, time compression, Technology and innovation influence the funding sources used for technology projects. Perhaps the most spectacular of the trailer last decades was the overall growth of venture capital.

Globalization is an umbrella term for a complex series of economic, social, technological and political changes seen as increasing interdependence and interaction between people and companies in different locations. The phenomenon has been observed since the 1980s in the context of sociological studies worldwide.

The term "globalization" is used to describe these changes as a collective process, or as the cause of global turbulence. The various applications include:

1. Economic and social positive as automotive trade, one that provides a better standard of living – prosperity for developing countries and wealth of the first World and Third World countries. According to this view that economic prosperity brings social prosperity. "

2. The implications Economic and social: As an engine of imperialism, the business that tramples on the rights of developing societies, claims to achieve prosperity, but often simply means plunder and speculation. Negative effects include cultural assimilation, through cultural imperialism, the export of artificial wants, and the destruction of society and culture.

The definitions of globalization are almost all very subjective, depending on the positionality and experience that defines them. A typical definition could be taken from the International Monetary Fund International, which defines globalization as economic interdependence growing countries worldwide through increasing volume and variety of cross-border transactions of goods and services, free international capital flows and more rapid and widespread diffusion of technology. All definitions seem to agree that the trend of globalization has economic, political, cultural and technological changes may be closely linked.

Reference

Narayanan, V. K (2001) Managing Technology and Innovation for Competitive Advantage, Englewood Cliffs, NJ: Prentice Hall.

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