An Application of Options Theory to R&D Investment Decision

On the basis of the research of real options, the shortcoming of the net present value(NPV) approach-one of the traditional approaches of investment decision-is pointed out in this paper. It is also found that NPV may undervalue the research and development(R&D) project. The discrete-time model, the continuous-time model and the two-period model of an R&D project investment decision are gotten. An example of investment decision of R&D is given.