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

Katherine Wynn
German Spangenberg
Kevin Smith
William Wilson

DOI:https://doi.org/10.5912/jcb787

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.

Keywords:real options ,investment valuation ,commercialisation ,wheat ,drought tolerance ,Department of Economic Development ,Jobs Transport and Resources ,Agriculture Victoria Services ,en ,