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)
Preview |
Text.
Filename: Deeney_etal_EJOR_2020_A_real_options_based_decision_support_tool_for_R_D_investment.pdf
Accepted Author Manuscript License: ![]() Download (1MB)| Preview |
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
-
-
Item type: Article ID code: 82312 Dates: DateEvent1 March 2021Published3 November 2020Published Online6 July 2020AcceptedKeywords: 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 > MathematicsDepartment: 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