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The option value of advanced R & D

✍ Scribed by Enrico Pennings; Onno Lint

Publisher
Elsevier Science
Year
1997
Tongue
English
Weight
876 KB
Volume
103
Category
Article
ISSN
0377-2217

No coin nor oath required. For personal study only.

✦ Synopsis

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. ]'his 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. ]'his way, the gap between real option theory and the practice of decision making with respect to investments in R &D is diminished.

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