Application of real options method to R&D management

How to evaluate an R&D project is a crucial topic in R&D management. The use of net present value (NPV) analysis as the evaluation of R&D projects has aroused many doubts. The so called 'real options' method has gained growing attention on application in the field of R&D. Real options approach permits a more flexible assessment of the future growth opportunities. We make a comparison of real options with traditional NPV and then present two methods of real options to evaluate R&D project. Our first object is to demonstrate that real options valuation approach is not only useful but also better than the traditional NPV method. Another objective is to present how to evaluate R&D project with real options method.