Pricing real abandonment options on several R&D investment projects

Much previous research has shown that the R&D investments can be evaluated by real growth options approach. But few studies have been done on real abandonment options for R&D projects which may not succeed. The contribution of this paper is not only to derive a more general closed-form solution for evaluating real abandonment options, but to put backup project consideration into our model for reality. We show that both Black-Scholes’s and Stulz’s models are special cases of our model under some specifications of parameters. From the simulation results, we explore that the higher the percentage of recovering salvage value, the more investment projects should be carried out. We hope that the results in this study could provide a useful reference for the manager, to make better decisions regarding backup projects.