MODIFIED METHOD OF REAL OPTIONS: EVALUATING R&D PROJECTS

The study reveals the problem of estimating the value of R&D projects that are considered as a two-stage process, during which a company makes two types of investments: an initial investment (purchase of an option) and a subsequent investment (exercise of an option). The value of an R&D project is determined by the option to invest in future business exploitation and the expected future cash flows from the commercialization of the R&D results. The authors of the article also note such R&D features as: large time periods between basic research and the commercialization of the results; high uncertainty of the cost and income; the need to take into account legislative regulation in the field of standardization and licensing. Due to the R&D projects' features, when applying the method of discounting cash flows during evaluating the R&D projects, uncertainty and, consequently, the degree of flexibility in management decision-making process, are not taken fully into account. Hence, the value of an R&D project is underestimated. The paper proves the expediency of using the method of real options in conjunction with the theory of games. To carry out a reliable valuation of R&D projects, the authors propose to use a complex model, created using the real options method with an integrated Poisson jump process. This made it possible to evaluate the option value of R&D projects, considering the possibility of "technical failure" at each stage of the project. This model is particularly effective in high-tech industry. (c) 2019 Published by Future Academy www.FutureAcademy.org.UK