TRAPS, PITFALLS AND SNARES IN THE VALUATION OF TECHNOLOGY

In a world where financial wizards ave seeking to maximize value for s hareholders through corporate restructuring, mergers, acquisitions, an d spin-offs, there is no escaping the question of how one values techn ology. The consequences of mis-valuing it, however; can be unfortunate . This article introduces the prevailing free cash flow method for val uation and the significant pitfalls that can occur in misuse of hurdle rates or miscalculating horizon value. It is equally important to rec ognize that much of the value of R&D is embedded in options, whether t hese ave simple options to terminate the project, or broad options to pursue a range of technology-based opportunities. Properly applied, di scounted cash flow (DCF) analysis can be an ally, rather than the neme sis, of innovation.