A fuzzy approach to R&D project selection

The complexity of R&D investment projects makes this task especially challenging. R&D investments are characterized by multiple sources of uncertainty, and produce cash flows only after many potentially unpredictable stages of research. The net present value (NPV) rule and other discounted cash flow techniques (DCF) for making R&D investment decisions seem to be inappropriate to build a portfolio of R&D projects as they favor short term projects in relatively certain markets over long term and relatively uncertain projects. Since many new products are identified as failures during the R&D stages, the possibility of refraining from market introduction may add a significant value to the NPV of the R&D project. Therefore R&D investments can be interpreted as the price of an option on major follow-on investments. In this paper we describe some basic properties of the fuzzy real options approach for research and development project evaluation, when the present values of future net cash flows and expected costs are estimated by fuzzy numbers of trapezoidal form.