Using Monte Carlo Simulation to Improve Ceramic R&D Investment Decisions
The success of ceramic companies is highly dependent on research and development (R&D). Thus, a pivotal aim of management is to allocate resources to the best scientific and financial R&D projects. But the valuation of ceramic R&D is a difficult task for managers. The conventional discounted cash flow (DCF) methods fail to consider the value of managerial flexibility provided by R&D projects. Real options Analysis (ROA) offers a superior way of capturing the value of flexibility. It enables decision-maker to value projects more accurately by incorporating managerial flexibilities into the valuation model. However, ROA can’t effectively deal with the volatility of parameters in itself under high uncertain circumstance. In view of the limitation of ROA, this paper uses Monte Carlo simulation to solve the parameters volatility problems. In the end, the case study proves that Monte Carlo simulation can improve R&D investment decisions, especially for highly unpredictable ceramic R&D projects.
Wei Pan and Jianghong Gong
B. C. He et al., "Using Monte Carlo Simulation to Improve Ceramic R&D Investment Decisions", Advanced Materials Research, Vols. 105-106, pp. 798-801, 2010