The Application Of Real Option In The Valuation Of R&D Projects

This paper firstly illustrates the importance of research and development for the economic development in our country, clarifies the objective and significance of this paper and ascertain that the content of this paper is to review the valuation theory and methods of R＆D projects, to introduce real options method and its application in R＆D projects valuation, construct the valuation system of R＆D projects by real options method, and to confirm the optimal valuation model by analysis of the model.R＆D is the basis to gain core competition, economic profit and request survive and development for a company. How to evaluate R＆D projects has been a hotspot at present. The basic valuation method of R＆D projects - discount cash flow approach can't adapt to the complexity and uncertainty of R＆D project management and adjust decisions according to market changes, so it has been doubted. However, the application of real option method in R＆D project investment not only consider the underlying project value based on cash flow values, but also consider time value and management flexibility for project investment and the value of decreasing uncertain information. This provides important foundation for completely evaluating R＆D projects.We will construct the real option valuation model for R＆D project under continuous time and discrete time. Under the continuous time, R＆D project investment has the characteristic of typically compound growth option. In terms of Geske(1979)'s compound option model and Bellalah(2001)'s compound option model with information cost, we construct the valuation model of R＆D project with no information cost and information cost. We educe the differential equation of investment option value and corresponding boundary condition by financial option pricing method, according to the stochastic changes of project value, and get the optimal investment principle. We explain the real option pricing method in discrete time and its application in R＆D project.This paper provides a new analysis frame for the investment decision of R＆D project and will have important theoretical and practical meaning for R＆D investment.