Assessing the prospects of an innovative project using a real put option

It is not feasible to limit the analysis of innovative projects to well-known economic and technical evaluation criteria, as it is necessary to take into account the possible risk of non-implementation of the project in the future. In such situations, it is necessary to take into account the possibility of early withdrawal from the relevant project with minimal losses in the form of liquidation value in the market valuation. Taking this factor into account adds managerial flexibility to the planned pro-ject, which also needs to be evaluated in money. Besides, this flexibility increases the modern cost of analyzed projects. Thus, we come to the need to assess the values of real put options for each in-novative project. The final choice of projects would then be more reasonable, i. e. taking into ac-count the use of possible future commercial and technical risks in its favour. The cost of a real put option reflects the prospects of an innovative project taking into ac-count the risk of nonimplementation. Thus, by adding a designated risk component to the two-dimensional, that is, in the plane, Pareto principle, we obtain a three-dimensional method in space that allows us to assess in more detail the effectiveness of an innovative project. This method is re-ferred to as the PPI (Perspective/Cost/Innovation) method, the essence of which is as follows. First, projects are compared in the horizontal plane according to the criteria of innovation and cost, and after selecting a set of projects on the Pareto principle, the remaining projects are compared using the criterion of perspective, that is, the cost of the real put option. This step-by-step PPI method has its advantages over building, for example, a conventional function of three variables. First, the PPI method involves a step-by-step analysis, where the Pareto principle can only be applied if the necessary information is available on the values of the general-ized indicators for the projects analysed, and the application of the PPI method is possible only after a subset of effective projects has been built. Second, the PPI method involves taking into account a set of scenarios for the development of each project, and also takes into account the cost of a real put option to abandon the project at some stage of its implementation, this is possible only after knowingly inefficient projects are excluded from the analysis, which significantly saves time and resources of economic calculations

Keywords: prospects of innovation project, PERT method, real put option


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