Corporate Value Creation: An Operations Framework for Nonfinancial Managers

APPENDIX E

R&D Growth and Investment Equation

INTRODUCTION

One of the challenges of deciding on appropriate amounts of R&D spending is estimating the cost of the next generation of product and the Revenue required to provide an adequate return. The R&D Growth and Investment Equation provides a simple way to quickly estimate what must be achieved.

In most companies one of the things that is known is the cost of the R&D effort to create the current generation of product. So it seems logical to use this as a starting point to make an estimate of the next generation's cost.

GENERATIONAL COST FACTOR

By definition, the Generational Cost Factor F is an estimate of the multiple by which the cost of the next generation will exceed the cost of the current generation. Then, if I_current is the R&D cost of the current generation expressed as a percentage of the lifetime revenues for the current generation LTRev_CurGen and I_Next the cost of the next generation also expressed as a percentage of the lifetime revenues, and the next generation is expected to generate LTRev_NextGen, then:

If the first-year revenue for the next generation is Rev_NextGen1 and Rev_LYCurGen the Revenue for the last year of ...