Valuation And Decision Of R&D Projects Under Uncertainty: Real R&D Option Model And Its Numerical Analysis

Research and development (R&D) is vital to the development of enterprises, but how to evaluate R&D projects has been a difficult problem. Traditional discounted cash flow (DCF) method, not considering the value of flexibility in decision-making, is unfit for the valuation of R&D projects with great uncertanty. Based on the real option theory and game theory, this dissertation develops a series of effective models of the valuation and decision of R&D projects. Subsequently, the models are solved and analyzed by the Monte Carlo method.This dissertation studies the valuation and decision of R&D projects by the view of single-firm and multi-firm. Considering some characteristics of R&D projects (including high-risk, multi-stage, expandablity, product life circle, etc.) and the decision of entry, exit and expandment, the single-firm model developed in this dissertation is more realitic. According with the option theory, the increased uncertainty will increase the value of R&D projectsIn a multi-stage model, parameters at different stages impact R&D projects in different ways, and a reasonable arrangement of various stages will enhance the value of projects. The expandablity of R&D projects will bring additional expansion options, and greatly enhance the value of projects. Of course, projects should not be expanded without limit, and there is an optimal size of the expansion. With the product life cycle characteristics, the arrival of the turning points will have a major impact on the value of projects.Based on above research results, the model is extended into the game model of competition, imitation and cooperation among firms, which can be used for choosing the optimal strategy for the game in decision making for R&D. The result of simulation shows that: (1) with the competitive conditions, the total value of both is less than the monopoly value, but the probability of successful completion of projects rises. The change of parameters has an opposite effect on competitor. (2)The total value of both under the imitative conditions is great than that under competition, which cost is the decrease of the probability of successful completion of projects. The favorable changes in the parameters of leader will help enhance the value of imitator, but that of imitator do greatly harm to the interests of leader. (3)Considering the game strategy, the two sides of equal strength will engage in fierce competition. And when strength is no match, the result may be "leading - imitation". Absolutely, if both sides could cooperate, cooperation can always bring more value with low cost.In modeling for real R&D options, there are some improvements for making these models more realistic. In the single-firm models, the process of investment cost is decomposed to reflect the difference in different stages, the process of cash flow is break up to reflect the changing needs of the various stages of the life cycle, and the mode of payoff is redesigned to reflect the expandablity of projects. In the mutli-firm game model, this dissertation introduces the marginal cost rate to reflect the strength of different firms, the spillover effect to the difficulty of imitation and the running costs to the additional cost of cooperation.The models of this dissertation, which are difficult to gain closed-form solutions, are solved by combining the LSM (Least Squares Monte Carlo) algorithm and the EAV (Extended Antithetic Variates) algorithm. This method is relatively simple with high precision, which is favor of the application of the model.