Title: An application of the real options approach to R&D investment decision making in a service division of an energy firm

Authors: Nobuhiko Nishimura

Addresses: Service Technology Section, Nagasaki R&D Center, Mitsubishi Heavy Industries, Ltd., 5-717-1, Fukahori-machi, Nagasaki 851-0392, Japan

Abstract: This study aims for the demonstration of the real options approach on valuing R&D projects and optimising the investment strategy to develop after-sales service products for thermal power plants in an energy firm. A compound option approach based on Geske|s analytical model with the volatility estimation through the questionnaire to experts was demonstrated to be an effective tool of R&D project valuation for decision-making. Furthermore, taking the quadrinomial lattice approach, considering the two important uncertainties of market and technology in R&D investment decision-making, applicability was demonstrated. From the relationship between the amount of R&D investment and the probability of technical success, R&D investment strategy was confirmed to be optimised using the approach. Furthermore, the R&D valuation process using real options approach tightens the relation between R&D division and sales division, to make market-orientated proposals.

Keywords: technology management; R&D valuation; real options; call option; compound option; quadrinomial lattice models; new product development; NPD; R&D investment strategy; after-sales service; market-oriented proposals; services technology; research and development; investment decision making; energy firms; thermal power plants.

DOI: 10.1504/IJSTM.2011.040377

International Journal of Services Technology and Management, 2011 Vol.15 No.3/4, pp.218 - 238

Available online: 25 May 2011 *

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