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The impact of delaying an investment decision on R&D projects in real option game

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  • Chang, Shuhua
  • Li, Yue
  • Gao, Fanglu

Abstract

In a research and development (R&D) investment, the cost and the project value of such an investment are usually uncertain, which thus increases its complexity. Correspondingly, the NPV (Net Present Value) rule fails to evaluate the value of this project exactly, because this method does not take into account the market uncertainty, irreversibility of investment and ability of delay entry. In this paper, we employ the real option theory to evaluate the project value of a R&D investment. Since the cost of a R&D investment is very high and the flow of the information is crowded, an investor cannot make an immediate decision every time. So, the proposed real option model is an exchange option. At the same time, combining the real option and the game theory, we can find the Nash equilibrium which is the optimal strategy. Moreover, we also study how the delayed time influences the price of the project investment and how the different delayed times effect the choice of the optimal strategies.

Suggested Citation

  • Chang, Shuhua & Li, Yue & Gao, Fanglu, 2016. "The impact of delaying an investment decision on R&D projects in real option game," Chaos, Solitons & Fractals, Elsevier, vol. 87(C), pages 182-189.
    • Handle: RePEc:eee:chsofr:v:87:y:2016:i:c:p:182-189
    DOI: 10.1016/j.chaos.2016.03.035
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