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This paper aims at investigating the application of real Options analysis of R&D
projects in the High-Tech Public Corporation. The Black-Scholes formula is
introduced to resolve the value of real option. Furthermore, we expanse the traditional
DCF Analysis, and give a new method which considers the uncertainty and risk in the
project. At last numerical example of valuation of R&D projects will be presented so
as to explain the proposed solution method in the article.
2 An Overview of Real Options
Real options allow decision-maker to potentially amplify good decision or mitigate
poor ones that can in loss to the project which add value to the R&D projects. Many
complicated decisions must be made during the investment decision-making of an
R&D project. For example, the decision-maker must account for many factors such as
the character of the project, cost of the project, and the needs of the products. Each
design parameter may provide flexibility which can be treated as real options
embedded in the project. In this paper, we will focus on the following two real
options:
(1)Expansion option
If the demand of products at research grows rapidly the decision-maker can
exercise a real option which gives him an opportunity to expanse the R&D project.
(2)Abandon option
If the demand of products at research too small to cover the cost of the R&D
project, decision maker has a real option which allows him to abandon the R&D
project.
Note that the above real options are Europe-style options which only allow the
decision maker emprise the option at the given time.
3 Formulations
3.1 Notation
B benefit of the R&D project
r risk free tate
μ the drift term of the benefit
σ the volatility of the benefit
B max the benefit can be awarded from the R&D project with the given planning
B min the benefit from patent transfer when stop the R&D project
T
the expiration time
t
any given time
V
value of the real option
V exp
value of the expansion option
V aban
value of the abandon option
P
the product demand
N ( d )
the cumulative distribution function of d
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