Ex-ante economic assessment in incremental R&D projects: technical and development time uncertainties addressed by the real options theory

Abstract

This paper analyzes changes in the assessment of an incremental R&D project by an industrial firm with the progressive consideration of the endogenous treatment of its main sources of uncertainty: technical performance and development time. We found that the project, which was unfeasible under a deterministic assessment by Net Present Value (NPV) without flexibility, became feasible after the treatment of the technical uncertainty by a real options model (NPV with flexibility). Moreover, the project gained approximately 51 percent more value in flexibility when a treatment of the development time uncertainty was added to the model. In terms of additional flexibility per unit cost of the project, the gain is approximately 44 percent. This result demonstrates the importance of addressing the combination of these sources of uncertainty in R&D projects, especially those that are incremental, which is a difficult category to analyze in terms of quantitative benefits.

Opções reais sob Incerteza Knightiana na avaliação econômica de projetos de Pesquisa e Desenvolvimento (P & D)

“…A descrição completa do projeto assim como de sua avaliação primária com o modelo de opções reais que nos serviu de base encontra-se em Leite et al (2012).…”

“…Essa situação é tratada na árvore de incerteza mostrada na Figura 3. Os resultados da avaliação do projeto em Leite et al (2012) correspondem ao que seria obtido no modelo modificado aqui sugerido (com Incerteza Knightiana), parametrizado em c = 0, ou seja, sem aversão à incerteza no sentido de Knight. A probabilidade de sucesso p é estabelecida em 50%.…”

“…No exemplo do projeto de Leite et al (2012) aqui verificado, caso o projeto seja de fato abandonado, o agente decisor terá sido pelo menos 0,36 avesso à Incerteza Knightiana em sua avaliação, caindo minimamente na categoria Moderada. A significação dessas categorias e as possíveis inferências dela resultantes são também um tema interessante para …”

Regulation of the Dynamics of Creating High-Tech Products

“…This distribution is often observed in the economy, production and engineering. Discussed are specific methodological approaches and models of development and manufacturing high-tech products [17,18]. The main aspects of the probabilistic description of creating high-tech products based on the use of a logistic model are disclosed [19].…”

Research and development project assessment and social impact

“…This should be taken into consideration by companies when assessing R&D projects. It is necessary to analyse, to discuss and to synthesise to solve social problems, just in the same way as medical examinations are performed to when assessments are made using the conventional financial techniques (Leite et al, 2012). In fact, traditional models for projects investment appraisal may rise some difficulties when there is uncertainty in the cash flows, forecasts or volatility of key variables.…”