The option value of advanced R & D

The option value of advanced R & D Existing tools for making R&D investment decisions cannot properly capture the option value in R&D. Since many new products are identified as failures during the R&D stages, the possibility of refraining from market introduction may add a significant value to the NPV of the R&D project. This paper presents new theoretical insight by developing a stochastic jump amplitude model in a real setting. The option value of the proposed model depends on the expected number of jumps and the expected size of the jumps in a particular business. The model is verified with empirical knowledge of current research in the field of multimedia at Philips Corporate Research. This way, the gap between real option theory and the practice of decision making with respect to investments in R&D is diminished. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png European Journal of Operational Research Elsevier

The option value of advanced R & D

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Publisher
Elsevier
Copyright
Copyright © 1997 Elsevier Ltd
ISSN
0377-2217
eISSN
1872-6860
DOI
10.1016/S0377-2217(96)00283-4
Publisher site
See Article on Publisher Site

Abstract

Existing tools for making R&D investment decisions cannot properly capture the option value in R&D. Since many new products are identified as failures during the R&D stages, the possibility of refraining from market introduction may add a significant value to the NPV of the R&D project. This paper presents new theoretical insight by developing a stochastic jump amplitude model in a real setting. The option value of the proposed model depends on the expected number of jumps and the expected size of the jumps in a particular business. The model is verified with empirical knowledge of current research in the field of multimedia at Philips Corporate Research. This way, the gap between real option theory and the practice of decision making with respect to investments in R&D is diminished.

Journal

European Journal of Operational ResearchElsevier

Published: Nov 16, 1997

References

  • Empirical testing of real option-pricing models
    Quigg, L.
  • A compact optical tape recording system
    Van Rosmalen, G.E.; Kahlman, J.A.H.; Put, P.L.M.; Van Uyen, C.M.J.

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