The Real Options Approach To Decision Problems In Applied Research, Investment In R & D Projects

Because of its great influence to the business enterprise, how to make the R&D projects investment decision under uncertainty has became an important problem for the enterprises. The real object option method has been paid great attention to solve this problem.This paper clarifies the characteristic of the R&D projects, design the investment frame of real options according to the theory of option. This paper mainly includes: 1. It reviews and analyzes the valuation theory of R&D project, introduce real option methods and its application in R&D projects-valuation, and construct the valuation frame to study.2.Our discussion bases on continuous real option models and introduce two stages real options. We give different models according to different stage including R&D Phase and Commercialization Phase. In the studies of R&D projects investment previous ignore the uncertainty in cost. This paper gives an extension, not only considering the uncertainty in future payoffs from the investment but also considering the uncertainty in cost. Thinking in the way of real option method, using the dynamic optimization programming, we give the equation that the investment opportunities meet. Then we tried to solve the equation and get the critical value. By analyzing the parameters to the conclusion of commercialization phase, we study at the difference between the investment decision by real option method and NPV method.In a word, this paper develops continuous models of R&D project, and introduces two-stage real options approach to value it. It takes into account uncertainty in project value and its cost, improves the known model, point out the investment method.