Real Options and Process Management of R&D Projects

With the rapid development of new technologies, the R&D project has the characteristics of long periods, many uncertain factors, and dramatic changes, so it has great uncertainty. As a result, R&D process is not a simple linear process whose results in the future can be accurately predicted, but a non-linear portfolio integrated by divergent thinking and knowledge extension. Traditional DCF method only considers tangible profits and costs, while for the projects like R&D, which depends to a great extent on future information, and includes a substantial amount of intangible profits and costs, the method will be unable to provide an objective and reliable standards in measurement. This paper, based on the economic lifespan of products, uses real options approach to evaluate the R&D project and presents two threshold values during the course of project as well as the decision-making guide line for managers in order to provide a more reliable quantification analysis to projects managers.