A real options based decision support tool for R&D investment : Application to CO2 recycling technology

Deeney, Peter and Cummins, Mark and Heintz, Katharina and Pryce, Mary T. (2021) A real options based decision support tool for R&D investment : Application to CO2 recycling technology. European Journal of Operational Research, 289 (2). pp. 696-711. ISSN 0377-2217 (https://doi.org/10.1016/j.ejor.2020.07.015)

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Abstract

We propose a practice relevant real options based decision support tool to aid in the practical evaluation of R&D investments in technology. Using a Poisson process to simulate the discrete progress typical of advancements in R&D, we take explicit account of the technical risk of the technology development, while market risk exposure and the effect of learning-by-doing through operating the technology is also explicitly modelled. We present a compound real option design, where a European real option structure is used to model the fixed length term typical of early phase research, which is exercisable into an American real option structure to model a subsequent phase R&D. In this latter phase, a successful outcome is acted upon immediately to operationalise the technology. We propose a simulation approach, which models R&D progress in a stylised logistic function or ’S-shape’ form, capturing the typically slow rate of R&D progress at the start of the early phase, through to more rapid improvement as the R&D advances, which then slows again as the limitations of the R&D are approached. We propose a business appropriate and workable economic meaning to this progress in the R&D process. We demonstrate the decision support tool with an application to evaluating the R&D investment potential in CO2 recycling technology, where an energy commodity is produced.

ORCID iDs

Deeney, Peter, Cummins, Mark ORCID logoORCID: https://orcid.org/0000-0002-3539-8843, Heintz, Katharina and Pryce, Mary T.;
  • Item type:Article
    ID code:82312
    Dates:
    Date
    Event
    1 March 2021
    Published
    3 November 2020
    Published Online
    6 July 2020
    Accepted
    Keywords:CO2 recycling technology, compound option structure, decision analysis, OR in research and development, real options, Electronic computers. Computer science, Mathematics, Computer Science(all), Modelling and Simulation, Management Science and Operations Research, Information Systems and Management, SDG 9 - Industry, Innovation, and Infrastructure
    Subjects:Science > Mathematics > Electronic computers. Computer science
    Science > Mathematics
    Department:UNSPECIFIED
    Depositing user: Pure Administrator
    Date deposited:12 Sep 2022 13:39
    Last modified:20 May 2023 04:07
    Related URLs:
    URI:https://strathprints.strath.ac.uk/id/eprint/82312
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