Investment Decisions Of R & D Projects Based On Real Options Approach To Research

R&D (Research and Development) is important in the development of companies, so it is raised to the height of strategy in many business enterprises. It is important to evaluate the investment of R&D.Option pricing theory is one of the greatest discoveries of finance in twenty century. Its principle, method and conclusion can be widely used in analyzing managerial issues and making decision in macro-economics. When option pricing theory is applied in field of investment, it turns into real option theory. Real option is one of new developments of option pricing theory. It not only enriched the connotation of the theory, but also provides a wholly new way of risky investment decision for companies and individuals. This article runs back over the developmental courses of real option theory and applies the contrastive method to do research. It points that real option have advantages in making decision when the risk is uncertain over NPV of the theory of cash flow.The article introduces the theory of real option to the decision of R&D investment. Having the characteristics of items changing a lot, various targets occurring and many phases existing, the R&D investment are proved to have the peculiarity of real option through the contrast between risky investment and R&D investment. Furthermore, it is appropriate to apply the theory of real option in the decision of R&D investment.This article also confirms that the theory of real option is proper for R&D item through the contrast with the traditional theory of NPV. Furthermore, a pricing model for R&D item is build based on real option theory. And then an example of medical enterprise is analyzed through the model.In the following paragraph, two examples about deferring investment and staged investment are presented to illustrate the advantages and limiting factors in...