Article2004

Valuation for the Strategic Management of Research and Development Projects: The Deferral Option

Neal A. Lewis · David L. Enke · David Spurlock

27 citations0/0 files storedEngineering Management Journal

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Capital Investment and Risk Analysis Stochastic processes and financial applications Financial Reporting and Valuation Research

Abstract

:The most widely used financial technique for evaluating projects is discounted cash flow; however, discounted cash flow analysis fails to consider flexibility. Real options analysis offers an alternative technique that provides value for the managerial flexibility that is inherent in most R&D projects. This article investigates the deferral option using computer simulation. There are five variables that determine the value of the deferral option, and simulations analyze these variables over a wide range of conditions. Sensitivity analysis on the five variables is performed and the results are discussed.

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1973The Pricing of Options and Corporate Liabilities 1994Investment Under Uncertainty.1994Investment under Uncertainty 1996Real Options: Managerial Flexibility and Strategy in Resource Allocation 1989Project management — A managerial approach 1996Real options: Managerial flexibility and strategy in resource allocation 2001Real Options: A Practitioner's Guide 2010Project management: the managerial process

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