ECONOMIC MODELS FOR R AND D PROJECT SELECTION IN THE PRESENCE OF PROJECT INTERACTIONS.

Abstract

A modeling framework is proposed within which certain kinds of benefit interactions, called present value (PV) interactions, are assessed indirectly by explicitly modeling R and D project impacts on profitability. Within the proposed framework, the role of traditionally recognized types of interaction in the calculation of present value is clarified, and it is shown that PV interaction exists even when traditionally recognized types of interaction are assumed to be absent. The proposed framework offers one method for assessing PV interactions. An example illustrates the framework and shows that ignoring PV interactions can result in both nonoptimal project selections and resource allocations, even when traditionally recognized types of interactions are absent.