Innovation and Ontologies

Innovation Gate 125
Transaction In (Debit) Out (Credit)
Incoming Loan +50'000 �
Sales (paid in cash) +30'000 �
Materials -30'000 �
Labor -10'000 �
Purchased Capital -10'000 �
Loan Repayment -5'000 �
Taxes -5'000 �
Total cash flow +40'000 �
table 40 Direct method to determine cash flow
For analysis of innovative concepts, only the direct method can be recommended. It subtracts
expenditures for an innovation (e.g. raw materials or machinery) from incomes (e.g. turnover of
the new product). The method is particularly suitable to analyze economic consequence for a
period of some years. Financial bottlenecks can hence be identified early on (Disselkamp, 2005).
Discounted Cash Flow
To further cash flow and tally it up to a financial ratio discounted cash flow (DCF) or net present value
(NPV) 149 can provide data for assessment.
DCF works by a yearly projection of cash flow, discounted to the present by a discount rate. The
discount rate is typically the least acceptable return for the company, i.e. the cost of capital and a
project-specific risk margin (Cooper, Edgett & Kleinschmidt, 2001). These future earnings
(discounted) are then tallied up. By subtracting initial expenditure, the net present value is
defined. If the NPV is positive, the innovative project has cleared the hurdle. In a second step, it
is possible to divide NPVs of different concepts by the key (or constraining) resource (e.g. the
R&D resources left for the project) and subsequently rank them according to this index.
By committing resources top down, starting with the best concepts, the value of the portfolio, i.e.
the sum of the NPVs across all projects, can be identified for a given amount of resources
(Cooper, 2001).
The prevailing advantage of DCF and NPV is the recognition of the importance of time and its
value. On the other hand, calculation of a DCF as well as of the discounting factor at this early
stage of an innovative project remains a challenge and effort is not to be underestimated (Mueller-
Stewens & Lechner, 2005).
149 Contrary to break-even and ROI, NPV is practically used and theoretically proven (Schmidt & Terberger, 2003).