A generalized fuzzy optimization framework for R&D project selection using real options valuation


Karsak E.

COMPUTATIONAL SCIENCE AND ITS APPLICATIONS - ICCSA 2006, PT 3, vol.3982, pp.918-927, 2006 (Journal Indexed in SCI) identifier

  • Publication Type: Article / Article
  • Volume: 3982
  • Publication Date: 2006
  • Title of Journal : COMPUTATIONAL SCIENCE AND ITS APPLICATIONS - ICCSA 2006, PT 3
  • Page Numbers: pp.918-927

Abstract

Global marketplace and intense competition in the business environment lead organizations to focus on selecting the best R&D project portfolio among available projects using their scarce resources in the most effective manner. This happens to be a sine qua non for high technology firms to sharpen their competitive advantage and realize long-term survival with sustainable growth. To accomplish that, firms should take into account both the uncertainty inherent in R&D using appropriate valuation techniques accounting for flexibility in making investment decisions and all possible interactions between the candidate projects within an optimization framework. This paper provides a fuzzy optimization model for dealing with the complexities and uncertainties regarding the construction of an R&D project portfolio. Real options analysis, which accounts for managerial flexibility, is employed to correct the deficiency of traditional discounted cash flow valuation that excludes any form of flexibility. An example is provided to illustrate the proposed decision approach.