Valuing and timing R&D using a real options pricing framework; including an application to the development of Lunar Helium-3 fusion

This dissertation uses the real options framework to study the valuation and optimal investment policies for R&D projects. The models developed integrate and extend the literature by taking into account the unique characteristics of R&D projects including uncertain investment in R&D, time-to-build, and multiple investment opportunities. The models were developed to examine the optimal R&D investment policy for the Lunar Helium-3 fusion project but have general applicability.; Models are developed which model R&D investment as an information gathering process where R&D investment remaining changes either as investment is expended and uncertainties are resolved. These models show that the value of the project increases as the variance of required investment increases. An extension of this model combines a stochastic benefit with stochastic investment. From this combination it follows that both the value of the R&D project and the region prescribing continued investment increased.; The policy implications are significant: First, when uncertainty of R&D investment is ignored, the value of the project is underestimated and a tendency toward underinvestment in R&D will result; and secondly, the existence of uncertainty in R&D investment will cause R&D projects to experience larger declines in value before discontinuation of investment.; The model combining stochastic investment with the stochastic benefit is applied to the Lunar Helium-3 fusion project. It is shown that investment in fusion should continue at the maximum level of {dollar}1 billion annually given current levels of costs of alternative fuels and the perceived uncertainty of R&D investment in the project.; A model is then developed to examine the valuation and optimal split of funding between R&D projects when there are two competing new technologies. Without interaction between research expenditures and benefits across technologies, the optimal investment strategy is to invest in one or the other technology or neither.; The multiple technology model is applied to analyze competing R&D projects, namely, Lunar Helium-3 Fusion and solar technology. The results show when it was optimal to invest in one or the other project.