Introduction of multi-stage evaluation in IT research and development project on real options

Considering the option characteristics of IT R&D investments, this paper introduced real options concept to analyze and evaluate R&D project investments in IT industry, and set up a model of the lattice binomial decision trees to solve the evaluation problems existing in multi-stage investments. It also proposed a compoud options approach to analyze the option value of R&D project with considering the uncertainty of technique, expected profit flow, and multi-stage contribution of R&D project. Moreover, this paper divided R&D project into three stages, including pre-experiment, large-scale research and commercialization, and then offered a multi-stage pricing model by using lattice binoamial decision trees for computering the option value of R&D investment. It also discussed the defect of this pricing model because of the high-evaluation error since the next option's value was viewed as the profit return of the current option, and proposed an improvement to this model as well. Finally an example of the value evaluation for an IT R&D investment project was given to demonstrate the application.