2013•Journal of Hebei UniversityRequires access

Application of real options theory in research and development project investment decisions

Xiaoyan Li

Abstract

A method for research and development project decision making based on real option theory is presented.Research and development project considers the uncetainty in future benefits,the irreversibility investment cost and the investment management flexibility.The economic value of research and development project includes maketing high income and the option value.Using real option theory to research and development project evaluation can not only overcome the inadequacy of discounted cash flow,but also make research and development project investment decision making more scientific and rational.A research and development project real option pricing model based on research and development project characteristics is given.The availability of the proposed method is verified by analyzing the numerical example.Finally,sensitivity analysis of the model parameters is done.

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Key concepts: Discounted cash flow, Flexibility (engineering), Project management, Investment (military), Research development, Net present value, Cash flow, Risk analysis (engineering)