R&D expenditures

Hello all,

Had this question come up in a case challenge I am currently working on and was wondering what you would answer to this question:

Suppose the president of your company has come to you for advice. He has noted that by eliminating R&D expenditures the company could have reported $8 billion more in net income. He is frustrated because much of the research rarely results in a product, or the products take years to develop. He says shareholders are eager for higher returns, so he is considering eliminating R&D expenditures for at least a couple of years. What would you advise?

Any thoughts..? Thanks.

Comments (3)

Feb 28, 2016

bump

  • Anonymous Monkey
  •  Mar 1, 2016

Well it depends. If he spends 8 bi in R&D, he must achieve some sort of competitive advantage.
If he is not geting that advantage, than I would sugest to invest somewhere else that can bring it.
I would consider that if the expcted return from the projects available in the company are lower than WACC, then give the money to the shareholders or buy back stocks.
Hope that helps you.
Regards
Alfredo Machado

Mar 1, 2016
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