Real Options Valuation of a

Abstract

The shareholder value contributed by new technology is uncertain, making it difficult to decide where, and how much, to invest in its development. In the valuation of a Technology Development Portfolio, different valuation techniques were required depending on project uncertainty. Projects with limited uncertainty (Development projects) were valued using Net Present Value models. Projects with the highest uncertainty (Technology Based projects) were justified by strategic needs, and the Intellectual Capital that emerged was valued at cost. Value Based Research, that bridge Technology Based and Development projects, required Real Options Valuation that recognises the value in probabilities of upside potential and management flexibility. Real Options Valuation of embedded options increased the portfolio value by a factor of 2,8 as compared to NPV, and resulted in project prioritisation aligned to management’s assessment of strategic value. This more holistic approach to technology valuation will enhance management’s investment decisions directed at furthering shareholder wealth.