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4.3 Numerical Sample
The benefit follows random walk:
dB
=
0.035
Bdt
+
0.2
B
dt
Other parameters are:
r =0.035 B =6500 C =7000 B max =8000 B min =1000 T =1
We use (17) (18) to get the value of V exp and V aban :
V exp =757 V aban =60
Considering the value of the real option,
BV
++ −= ++− = >
V
C
6500
757
60
7000
317
0
exp
aban
Then the project is accepted. The relationship between option value and time, E is
showed in Fig. 1.
Fig. 1. The value of options
5 Conclusions
In this paper we have presented a stochastic model for decision making in R&D projects
investment. Instead of traditional discounted Cash flow Analysis, the new method which
uses real option theory considers numerous uncertainties in the investment. The Black-
Scholes formula is introduced to computer the value of the real option. Numerical results
indicate that the proposed model is helpful to the decision maker.
References
1. Baldwin, C.Y., Clark, K.B.: Modularity in design: An analysis based on the theory of real
options. Harvard Business School (1994)
2. Kumaraswamy, A.: 1998. An organizational real options perspective of firms' R&D:
Empirical evidence. Paper presented at the Second Annual Conference on Real Options,
Theory Meets Practice Chicago (June 1998)
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