| Research and development investment activity plays a significant role in the process of accelerating technology innovation, improving enterprises' ability and developing nation's economy. R&D investment activity needs not only enough funds but also adequate project valuation methods.After comparison of R&D project investment and traditional project investment, the paper explains that discounted cash flow method represented by net present value can't seize the whole value of R&D project. Considering the high uncertainty and multi-phase characters, the paper forwards the applicability of real option methods in this field. Then, the paper introduces case of medicine A R&D project of First pharmaceutical factory and shows the failure of DCF application in the project valuation. Based on real option theory, the paper advances real option analysis framework of R&D investment and points out the value of R&D project is the sum of value calculated by DCF and the option value. According to the framework, the paper revalues medicine A project, forwarding that the option inherent in this project is exchange compound option and measuring the option value by use of Margrabe exchange option model, Can-exchange compound option model and binomial pricing model. Adding the option value, medicine A R&D project given up by NPV method is recognized by the management of First pharmaceutical factory.The application of real option method in medicine A R&D project resolves the problem which can't be settled by traditional ways and offsets the flaws of traditional discounted cash flow methods. This paper has theoretical significance and practical value to solving the current problem of low R&D investment caused by lack of quantifying methods in our country.
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