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

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.