An Application Research On Real Options Approach In Weapons And Equipments Research Investment

There are lots of economic and technical uncertainties in the weapons and military equipments development process, which often lead to mistakes in investment decision of weapons and military equipments development. Real option method has an advantage over addressing uncertainties, which retains positive effect brought by the uncertainty and avoids the negative effect, and it has significant influence to bring it into investment decision making process of military equipments development. Weapons and military equipments investment projects have great flexibility as sequence investment and the value of this flexibility calculated by real options mathematical expression is the real options value the project contains. Different from traditional methods, in the real options approach, the value of military equipments development project is sum of the value calculated by the net present value method and the real options value the project contains. Using real options method in investment decision making process of military equipments development breaks inherent limitations of traditional methods and takes investment irreversible and flexibility into account. It increases the effectiveness of military investment return by emphasizing the risk and benefits asymmetry of projects and minimizes sunk cost and investment risk, in order to play the greatest role of limited funding and enable military investors to better control equipment developing risk and increase investment opportunities.