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NASA technology assessment using real options valuation

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  • Robert Shishko
  • Donald H. Ebbeler
  • George Fox

Abstract

We examine the use of real options valuation in the context of prioritizing advanced technologies for NASA funding. Further, we offer a set of computational procedures that quantifies the option value of each technology. Other researchers have applied a real options framework to private sector investments. In the case of NASA investments in advanced technologies, the underlying products, which must be used to justify the investments, are space‐related scientific results and discoveries from completed missions to be shared worldwide. As in the private sector, uncertainty plays a significant role in the motivation to use real options in NASA. Uncertainty in NASA technology investments can be classified as development risk and programmatic risk (whether missions using the technology will actually fly). The latter might be called the technology “market risk.” We carried out the approach on a number of planetary exploration technologies. We illustrate the detailed calculations using one of them—lightweight propellant tank technology. © 2003 Wiley Periodicals, Inc. Syst Eng 7: 1–12, 2004

Suggested Citation

  • Robert Shishko & Donald H. Ebbeler & George Fox, 2004. "NASA technology assessment using real options valuation," Systems Engineering, John Wiley & Sons, vol. 7(1), pages 1-13.
    • Handle: RePEc:wly:syseng:v:7:y:2004:i:1:p:1-13
    DOI: 10.1002/sys.10052
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    References listed on IDEAS

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    1. Merton, Robert C, 1998. "Applications of Option-Pricing Theory: Twenty-Five Years Later," American Economic Review, American Economic Association, vol. 88(3), pages 323-349, June.
    2. Majd, Saman & Pindyck, Robert S., 1987. "Time to build, option value, and investment decisions," Journal of Financial Economics, Elsevier, vol. 18(1), pages 7-27, March.
    3. John R. Hauser, 1998. "Research, Development, and Engineering Metrics," Management Science, INFORMS, vol. 44(12-Part-1), pages 1670-1689, December.
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    Cited by:

    1. Adam M. Ross & Donna H. Rhodes & Daniel E. Hastings, 2008. "Defining changeability: Reconciling flexibility, adaptability, scalability, modifiability, and robustness for maintaining system lifecycle value," Systems Engineering, John Wiley & Sons, vol. 11(3), pages 246-262, September.
    2. Avner Engel & Yoram Reich, 2015. "Advancing Architecture Options Theory: Six Industrial Case Studies," Systems Engineering, John Wiley & Sons, vol. 18(4), pages 396-414, July.
    3. Douglas A. Bodner & William B. Rouse, 2007. "Understanding R&D value creation with organizational simulation," Systems Engineering, John Wiley & Sons, vol. 10(1), pages 64-82, March.
    4. Wanda Peters & Steven Doskey & James Moreland, 2017. "Technology Maturity Assessments and Confidence Intervals," Systems Engineering, John Wiley & Sons, vol. 20(2), pages 188-204, March.
    5. Joost Buurman & Stephen Zhang & Vladan Babovic, 2009. "Reducing Risk Through Real Options in Systems Design: The Case of Architecting a Maritime Domain Protection System," Risk Analysis, John Wiley & Sons, vol. 29(3), pages 366-379, March.

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