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Recent Articles New product development often requires continued funding in a context where the time to innovation (time to product completion) is uncertain. At the same time, changing market conditions and the competitive environment often alter the profit outlook of the finished product. The high degree of uncertainty in this kind of project calls for periodic adjustment of funding policies and, consequently, a valuation methodology that accurately captures the interplay between uncertainty and management options. This article illustrates such methodology through a simple case study that incorporates important dynamic aspects of an R&D project that cannot be accommodated by traditional discounted cash-flow (DCF) valuation methodologies. Structured Approach to R&D Valuation - Using Investment Science to analyze new ideas (1/28/03) Many R&D managers have profited from realizing there is value in planning for uncertainty and that delaying some decisions until new information is available often is a value maximizing measure. This case study captures these ideas in a structured manner and illustrates an evaluation methodology based on two key principles. Recent How To's Sometimes it is desirable to view a cash flow as fluctuating in a random manner around some set level or path. Such behavior can be conveniently modeled by a mean reverting process. A typical mean reverting model that can easily be implemented in a spreadsheet is the exponential Ornstein-Uhlenbeck(O-U) mean reverting process which we will discuss here. Using simulation to calculate the NPV of a project(5/31/02) Monte Carlo simulation is fast becoming the technology of choice for evaluating and analyzing assets, be it pure financial derivatives or investments in real assets. |
Top How Tos 1 Maximum Likelihood Estimation of Mean Reverting Process 2 Discounting a mean reverting cash flow 3 Using simulation to calculate the NPV of a project Top Articles 1 Real Options Primer Portfolion 2 Pricing an R&D Venture with Uncertain Time to Innovation 3 Structured Approach to R&D Valuation - Using Investment Science to analyze new ideas |
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