Real R&D Options

18 Pages Posted: 29 Oct 2004

See all articles by Martin Widdicks

Martin Widdicks

University of Manchester - Manchester Business School

Dean A. Paxson

Manchester Business School; University of Manchester - Manchester Business School

David Newton

University of Bath - School of Management

Abstract

Real options have been growing in popularity in recent years, and this has been accompanied by improvements in their modelling and valuation. Real options enable companies or managers to value projects more accurately by incorporating managerial flexibilities into the valuation model. This is in contrast to traditional discounted cash flow valuation, where projects are assumed to proceed as planned, regardless of future events. One area where real option techniques have been used extensively is in R&D. This paper gives a review of the research on real R&D options, starting with the fundamentals, then detailing more innovative and up-to-date models as well as discussing the difficulties of applying these models, particularly with reference to parameter estimation. It also attempts to provide a "best practice" for practitioners wishing to value R&D projects using real options.

Suggested Citation

Widdicks, Martin and Paxson, Dean A. and Newton, David, Real R&D Options. International Journal of Management Reviews Vol. 5-6, No. 2, pp. 113-130, June 2004. Available at SSRN: https://ssrn.com/abstract=608491

Martin Widdicks (Contact Author)

University of Manchester - Manchester Business School ( email )

Oxford Road
Manchester M60 1QD, M13 9PL
United Kingdom

Dean A. Paxson

Manchester Business School ( email )

Crawford House
Oxford Road
Manchester M13 9PL
United Kingdom

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

David Newton

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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