Multi-stage research and development project appraisal under uncertain composite real options

Abstract

This paper presents an innovative composite real options model that integrates uncertainty theory to evaluate multi-stage research and development (R&D) projects when facing both market and technical risks. Unlike traditional valuation methods that often fail to capture the dynamic and uncertain nature of R&D investments, the proposed model allows decision-makers to take into account managerial flexibility and staged investment opportunities. By incorporating uncertain differential equations, the model offers a more accurate representation of the complex and evolving risks that are inherent in R&D projects. The key advantage of this approach is its ability to dynamically adjust to changing market conditions, thus providing a more realistic valuation framework. Furthermore, the model emphasizes the importance of decision-making at each stage, helping to minimize financial exposure and optimize the resource allocation. The practical significance of this model lies in its potential to enhance investment decisions, guiding R&D efforts toward greater financial feasibility and strategic value. Future applications could extend the framework to include additional uncertainties, such as regulatory risks or competitive dynamics, further broadening its utility across various industries.