The Valuation Model And Empirical Analysis Of Enterprise R&D Project Based On The Compound Real Options

R&D project is the core part of today's business world, it should not be ignored in the major policy decisions of enterprice. Design and development of the new products or new strategy is often a key factor of business survival. Therefore making the right evaluation to the R&D project has a significant impact for the enterprise and even the society. Due to the R&D project investment is a kind of platform?flexible?creative and risky.Traditional DCF methods neglect its flexibility to miscalculation or underestimate the value of R&D project, in the 80 s was questioned by the scholars in succession. The concept of real options was put forward by Myers (1977), it has a revolutionary effect to the enterprise R&D project valuation.Because the option valuation theory is very good to cater to the characteristics of flexible management, thus be widely considered as compare joint method to estimate the true value of R&D project by scholars. While because the complexity and the multi-stage investment of R&D projects, regarding it as a collection of real options, namely in the form of compound real options pricing and evaluating is more in line with the actual situation, so the value of R&D project is due to the project cycle of compound real option pricing system.This article mainly uses Monte Carlo simulation method to evaluate the enterprise R&D projects embarks from the compound real options visual.We will first of all build the simulation model of compound real options to system analysis the compound real option characteristics of R&D project, according to the major risk factors that affect the value of the project, correcting the mathematical model which the underlying asset follows. Secondly, to the model of solving, we attempt to use the Least Squares Monte Carlo simulation method which was proposed by Longstaff and Schwartz, it can solve backward iterative American option pricing problems by determine the best execution strategy of American options.In order to demonstrate the effectiveness of the pricing method, this paper chooses the software development industry R&D project case to specific analysis. In a software development project cycle, it may contain abandoned or delayed, expansion, contraction, and conversion options, it has a lot of typical characteristics of compound real options. We will build stochastic model which the expected cash flow follows. We select correct model according to actual condition based on the traditional random Brownian motion model and make a new set of model parameter, mainly include the following two aspects:First, especially considering the technical risk and risk of incident, we will consider its impact on cash flow as a jump factor.This paper described it as a poisson process, therefore using a random model of jump diffusion model as the underlying variable. Secondly, on the jump diffusion model of a differential equation set parameters we do three improvings, one is the choose of risk-free interest rate, Because of the uncertainty of the risk-free interest rate, we use aaa five-year Treasury rates as risk-free discount factor; Second, on volatility of the project value, according to the periodic characteristics of R&D project, we adopt periodic volatility values, it's different from the initial single fluctuation; The three is parameter estimation method, To estimate the volatility,wo adopt the combination of experts estimate method and logarithmic normal cumulative probability distribution; For the estimation of Jump factor in the model,we use MCMC method of financial engineering. In addition, for the transformation option which can be performed in advance and expansion option which can't be executed in advance, we will mainly use the LSM method and the monte carlo numerical simulation method, combining with the general concrete calculation process is given.Finally based on volatility and valuation results we make the sensitivity and the convergence analysis, we get that project value increased with the increase of volatility increased,which illustrates the theory of compound real option valuation of R&D project mathematics the risk and unknown opportunity, namely the uncertainty represents the R&D project of the option premiun. Convergence analysis results show that by increasing the simulation, the valuation results tend to be small fluctuations near a fixed value, it said the good stability of this method.