Valuation of R and D Projects Using Options Pricing and Decision Analysis Models

Robert K. Perdue, William J. McAllister, Peter V. King and Bruce G. Berkey
Additional contact information
Robert K. Perdue: Westinghouse Electric Company, 1340 Beulah Road, Pittsburgh, Pennsylvania 15235-5082
William J. McAllister: Siemens Westinghouse Power Corporation, 1310 Beulah Road, Pittsburgh, Pennsylvania 15235
Peter V. King: Century Farm Convenience Center, 2100 Highway 86, Piedmont, South Carolina 29673
Bruce G. Berkey: Ingersoll Rand, 98100 West Kincey Avenue, Huntersville, North Carolina 28078

Interfaces, 1999, vol. 29, issue 6, 57-74

Abstract: A combination of options-pricing techniques and decision-analysis tools forms a practical process for evaluating R and D projects in a way that correctly values the impact of decision flexibility and the inevitable technical and commercial uncertainties. The options perspective leads to research-funding and project-selection decisions that can be radically different from those developed using the standard net-present-value financial rule. Decision-analysis tools simplify data acquisition. We applied the process at the Westinghouse Science and Technology Center using 13 embryonic research projects as a pilot test and subsequently applied it to the center's complete portfolio of research projects. Such an approach can be cost-effective for the type of scaled-down and decentralized research efforts that increasingly characterize US industry and can help research managers to optimize the level and composition of their research portfolios.

Keywords: decision analysis; applications; research and development; project selection (search for similar items in EconPapers)
Date: 1999
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Citations: View citations in EconPapers (6)

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