| Abstract | This research aims to improve the valuation process for the individual project
investment problem and the selection process for the project portfolio investment
problem in three stages: research (R), development (D) and acquisition (A). The
proposed valuation model is developed to help evaluate an individual RDA project
investment based on the option valuation approach by incorporating more practical
decision alternatives, namely, the chance to sell the patent and the ability to postpone
the start of a project. With these two additional decision alternatives, the firms have
more managerial flexibility which brings more true value to the RDA project. The
decision for the investment in the RDA project is then made based on more reliable and
practical method.
In this research, not only technical but also market uncertainties are taken into
consideration in the valuation process of the technical stages, i.e., research and
development stages. Both unce1tainties affect the investment decision in contradicting
ways. Technical unce1tainty makes the investment in the research and development
stages more attractive, while market uncertainty makes it less attractive as the option
value of postponement increases. However, under the situation of high market
unce1tainty, instead of abandoning the project since the beginning of the technical
stages, the postponement decision keeps the option to invest in the project later alive. It
was confirmed through simulated experiments that there exists a very high chance that
the postponement decision can turn into the decision to invest. The patent option was
also comparatively analyzed with the decision to invest. The simulated results did
confirm the significance of the chance to sell the patent as a safer decision under the
situation of high market uncertainty. In addition, it has been founded that a sh01ter term
of patent agreement significantly helps to improve the advantage of the patent sales over
the immediate investment.
With regard to the RDA project p01tfolio selection problem when the budget is limited,
this research confirmed that not all of the projects which have been evaluated to be
optimal to invest will be selected. Instead, these projects have to be compared with each
other. Traditionally, when a project has been rejected, it is rejected or abandoned
forever since the beginning. Likewise, the projects that were evaluated to be optimal to
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postpone will be rejected forever from the portfolio. However, from option perspective
proposed in this research, these projects should only be rejected temporarily and should
be given a chance to be reconsidered. In this research, three investment policies, i.e.,
patent, switch and postponement policies, are proposed based on option approach for
selection process of the sequential RDA project portfolio investment problem subject to
a budget constraint in which the projects are assumed to be independent. The
performance under each policy for different amounts of available budget derived
through Monte Carlo simulation indicated that the proposed policies would help
improve the efficiency of the limited budget by keeping the investment opportunity of
the postponed and good rejected projects alive instead of abandoning them since the
beginning.
It can be concluded that each proposed policy is useful in a specific situation. In details,
when there exists budget left from investing in all good projects, i.e., in the projects
with the optimal decision to invest, the postponement policy suggests to reconsider the
postponed projects with high technical unce1iainty in the future. However, when the
available budget is not enough for all good projects, the switch policy suggests
considering the good rejected projects again in the next period in parallel with the
running projects since there is an option to invest in such projects later due to the
possibility of technical failure occurrence in the running projects. In addition, if the
switch policy is not applicable in case that the planned budget of the failed running
projects is not enough to switch to any good rejected project, there is an option to invest
for the patent sale at the end of the research or development stage in such projects by
employing partial budget allocation scheme .. |