Strategic plan and R&D Portfolio Optimization

Referring to the firm BBB, assume to know the main information (in confidential way and only for internal use) regarding the new projects
potentially available at the year 2018 in the Corporate Research. The manager of the Corporate Research has to discuss with the board about the
budget for the new projects (zero-base budget). He knows that generally the 90% of this budget is allocated to projects already in the pipeline.

The following tables report the data of the projects in the pipeline (tab. 1) and the ones to be started in 2018 (tab 2 e 3).

The Corporate Research manager moreover knows:

▪ the board has identified as priority strategic technological areas A2, A3 and A5 for the years 2018-2030;
▪ area A4 is strictly interrelated and dependent to the area A3;
▪ area A7 is the one in which BBB has less experience.

Project n. Probability of technical Attended NPV Time to be completed (years) Technological Area
success (mln €)
1 0.5 700 5 A3
2 0.4 850 8 A1
3 0.4 800 9 A1
4 0.3 1100 12 A5
5 0.5 600 6 A7
6 0.5 750 6 A7
7 0.7 500 2 A4
8 0.7 -200 2 A2
9 0.4 600 10 A9
10 0.3 1000 10 A3
Tab 1: Projects in pipeline

Project 1 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 5000000 3000000 3000000
R&D Costs 250000 250000 250000 250000 200000 200000 200000 200000
Other Costs 120000 120000 120000 100000 100000 100000 100000 100000 100000 100000 100000
Revenues Attended 1200000 1200000 1200000 2000000 2000000 3000000 3000000

Project 2 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 2500000 2500000
R&D Costs 1300000 1300000 1300000
Other Costs 300000 300000 300000 300000 300000 300000 300000
Revenues Attended 2300000 2300000 2300000 2300000 2300000 2300000

Project 3 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 1400000 2000000 2000000
R&D Costs 4500000 4500000 4500000 4500000 4500000 4500000 4500000 4500000 4500000 4500000 4500000
Other Costs 2200000 220000 220000 220000 220000 120000 120000 120000 120000 120000 120000
Revenues Attended 12000000 12000000 12000000 12000000 12000000 12000000

Project 4 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 5000000
R&D Costs 2300000 2300000 2000000 2000000 2000000 2000000
Other Costs 500000 500000 500000 500000 500000 500000
Revenues Attended 8000000 8000000 8000000

Project 5 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 5000000
R&D Costs 2300000 2300000 2000000 2000000 2000000 2000000
Other Costs 500000 500000 500000 500000 500000 500000
Revenues Attended 8000000 8000000 8000000

Project 6 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 17000000 2000000 3000000
R&D Costs 8900000 8900000 8900000 8900000
Other Costs 340000 340000 340000 750000 750000 750000 750000 750000 750000
Revenues Attended 24000000 20000000 14000000 13000000 13000000 13000000

Project 7 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 3000000
R&D Costs 25000 25000 25000
Other Costs 2000 2000 2000 2000 2000 2000
Revenues Attended 370000 370000 370000 370000 370000

Project 8 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 2000000
R&D Costs 1200000
Other Costs 2000000 2000000 2000000 2000000
Revenues Attended 950000 950000 1400000 1400000 1400000

Project 9 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Years 1 2 3 4 5 6 7 8 9 10 11
Inv 11000000 5000000 1000000
R&D Costs 3600000 3600000 3600000 3600000 3600000 10000000 10000000
Other Costs 1000000 1000000 1000000 1000000 1000000 1000000 1000000 1000000 1000000 1000000 1000000
Revenues Attended 9000000 15000000 15000000 17000000 12000000 12000000 12000000
Tab 2: economic and financial data of the new projects, to be started in 2018 1

Project n. Technological Revenues Costs Technical Risk

Areas Oscillation Oscillation
1 A2 ± 5% ± 5% 0,5
2 A3 ±10% ±10% 0,3
3 A7 ± 20% ± 20% 0,3
4 A2 ± 5% ± 5% 0,1
5 A1 ± 3% ± 3% 0,1
6 A9 ± 30% ± 30% 0,4
7 A1 ± 5% ± 5% 0,2
8 A4 ± 10% ± 10% 0,2
9 A7 ± 8% ± 8% 0,4
Tab 3: other data of new the new projects, to be started in 2018

1
For all the projects, depreciation and amortization are included in “R&D costs” or “Other Costs”