Using Real Options to Estimate the Pre-commercialisation Value of a Drought Tolerant Wheat Trait

Abstract

Uncertainty, sunk investment costs and managerial flexibility means standard investment budgeting methods such as net present value are ineffective and undervalue risky investments. Real options attains a more accurate and comprehensive assessment of investments. In this study, we apply a real options analytical framework to investment decisions during the research and development (R&D) process of a drought tolerant wheat trait. The results suggest the option value for investment is positive at each R&D stage and that investors should continue to invest. Biotechnology firms should use a real options analytical framework like the one applied in this paper for investment strategy development and for investment decisions involving uncertainty, sunk costs and decision flexibility.