Study Of Methods Of Economic Feasibility Evaluation For New Vehicle R&D Project Based On Real Option

The project managers or top leaders of a company have right to temporarily shutdown,contract, expand,abandon, defer and continue the project (called as managementflexibility) in a new car R&D project with long development lifecycle, many engineersand huge investment. The traditional DCF (Discounted Cash Flow) method of the projecteconomic feasibility evaluation couldn’t evaluate management flexibility which causehuge risk. Then top leaders of a company to make a final decision according tothemselves’ experience. As the car market in China gradually become steady, a new careconomic feasibility evaluation is more important for a new product developmentdecision.Based on GVDP (Global vehicle development progress), the thesis analyzes the anew car R&D project using real option. The study content of the thesis is as followed:1. It introduces GVDP with many review gates and focus delivery list of economicfeasibility evaluation in different gate. And The multi-phases review cause manymanagement flexibility (temporarily shut down option, contract option, expand option,abandon option, defer option and continuing option).2. It introduces traditional DCF method, including NPV, internal return rate,investment return time. Based on GVDP, it identifies the disadvantage of DCF. Further,the real option method (Black-Scholes model, BM model) is introduced. Finally, Geskemodel is introduced as a effective method which focus the tree-phase R&D project withmuch uncertainty.3. The Geske model is applied to a new car development project in a company. It isconfirmed that the real option method is more effective than DCF in the evaluation ofmanagement flexibility.