The Analysis of Patent Option for RDA Project Valuation
This paper proposes an application of the option valuation approach to evaluate a project investment in three stages: research (R), development (D) and acquisition (A). To reflect different correlation and effect of each type of uncertainty on option values and, consequently, investment decisions, t...
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| Format: | Article |
| Language: | English |
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The Japan Society of Mechanical Engineers
2010-06-01
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| Series: | Journal of Advanced Mechanical Design, Systems, and Manufacturing |
| Subjects: | |
| Online Access: | https://www.jstage.jst.go.jp/article/jamdsm/4/3/4_3_683/_pdf/-char/en |
| _version_ | 1828782361647513600 |
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| author | Angsumalin SENJUNTICHAI Anulark TECHANITISAWAD Huynh Trung LUONG |
| author_facet | Angsumalin SENJUNTICHAI Anulark TECHANITISAWAD Huynh Trung LUONG |
| author_sort | Angsumalin SENJUNTICHAI |
| collection | DOAJ |
| description | This paper proposes an application of the option valuation approach to evaluate a project investment in three stages: research (R), development (D) and acquisition (A). To reflect different correlation and effect of each type of uncertainty on option values and, consequently, investment decisions, the proposed valuation and decision model incorporates both technical and market uncertainties into the first two technical stages (R&D) of the project, and the market uncertainty only into the last stage (A). Changes in project values are accordingly captured in each stage by the combined geometric Brownian motion and Poisson jump downward processes. The model incorporates the patent sale alternatives in the development and acquisition stages. A dynamic programming, decision tree model is solved to determine the option values and optimal decisions subject to decision rules, critical values, and certain boundary conditions. We subsequently evaluate the model effectiveness by comparing its decisions with those of an existing valuation model and the net present value method. The Monte Carlo simulation results show that under the option valuation by which the loss is limited to the initial costs of investment, a positive profit in a wide range can be obtained with more than 50% chance, in spite of the small average profit. The results of simulation also verify the significance of the chance to sell the patent as a safer decision under the high market uncertainty. In addition, a shorter term of patent agreement significantly improved advantage of the patent sale over the immediate investment in an optimistic situation. |
| first_indexed | 2024-12-11T17:47:27Z |
| format | Article |
| id | doaj.art-a34de7e25225499bae21fd0e510d8ce0 |
| institution | Directory Open Access Journal |
| issn | 1881-3054 |
| language | English |
| last_indexed | 2024-12-11T17:47:27Z |
| publishDate | 2010-06-01 |
| publisher | The Japan Society of Mechanical Engineers |
| record_format | Article |
| series | Journal of Advanced Mechanical Design, Systems, and Manufacturing |
| spelling | doaj.art-a34de7e25225499bae21fd0e510d8ce02022-12-22T00:56:19ZengThe Japan Society of Mechanical EngineersJournal of Advanced Mechanical Design, Systems, and Manufacturing1881-30542010-06-014368370010.1299/jamdsm.4.683jamdsmThe Analysis of Patent Option for RDA Project ValuationAngsumalin SENJUNTICHAI0Anulark TECHANITISAWAD1Huynh Trung LUONG2Department of Industrial Engineering, Faculty of Engineering, Chulalongkorn UniversitySchool of Engineering and Technology, Asian Institute of TechnologySchool of Engineering and Technology, Asian Institute of TechnologyThis paper proposes an application of the option valuation approach to evaluate a project investment in three stages: research (R), development (D) and acquisition (A). To reflect different correlation and effect of each type of uncertainty on option values and, consequently, investment decisions, the proposed valuation and decision model incorporates both technical and market uncertainties into the first two technical stages (R&D) of the project, and the market uncertainty only into the last stage (A). Changes in project values are accordingly captured in each stage by the combined geometric Brownian motion and Poisson jump downward processes. The model incorporates the patent sale alternatives in the development and acquisition stages. A dynamic programming, decision tree model is solved to determine the option values and optimal decisions subject to decision rules, critical values, and certain boundary conditions. We subsequently evaluate the model effectiveness by comparing its decisions with those of an existing valuation model and the net present value method. The Monte Carlo simulation results show that under the option valuation by which the loss is limited to the initial costs of investment, a positive profit in a wide range can be obtained with more than 50% chance, in spite of the small average profit. The results of simulation also verify the significance of the chance to sell the patent as a safer decision under the high market uncertainty. In addition, a shorter term of patent agreement significantly improved advantage of the patent sale over the immediate investment in an optimistic situation.https://www.jstage.jst.go.jp/article/jamdsm/4/3/4_3_683/_pdf/-char/enoption approachrda project valuationpatent optiondynamic programmingsimulation analysis |
| spellingShingle | Angsumalin SENJUNTICHAI Anulark TECHANITISAWAD Huynh Trung LUONG The Analysis of Patent Option for RDA Project Valuation Journal of Advanced Mechanical Design, Systems, and Manufacturing option approach rda project valuation patent option dynamic programming simulation analysis |
| title | The Analysis of Patent Option for RDA Project Valuation |
| title_full | The Analysis of Patent Option for RDA Project Valuation |
| title_fullStr | The Analysis of Patent Option for RDA Project Valuation |
| title_full_unstemmed | The Analysis of Patent Option for RDA Project Valuation |
| title_short | The Analysis of Patent Option for RDA Project Valuation |
| title_sort | analysis of patent option for rda project valuation |
| topic | option approach rda project valuation patent option dynamic programming simulation analysis |
| url | https://www.jstage.jst.go.jp/article/jamdsm/4/3/4_3_683/_pdf/-char/en |
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