Approaches for evaluating a portfolio of R&D projects with a budget

The Real Options approach has proved to be a suitable methodology for capturing the flexibility in the investment decision process. This is very useful for the financial evaluation of R&D projects where there are several possible decisions concerning to the investment – delaying, improving or abandoning. Since the risk of an R&D project is usually due to singular characteristics of the project and is uncorrelated with the financial markets, the contingent claims analysis may be not adequate to value R&D projects. Based on a dynamic programming evaluation model developed by Huchzermeier and Loch (Management Science 47(1): 85-101, 2001), we propose two approaches to valuing a portfolio of R&D projects with a budget. Specifically, considering a budget constraint, in the first approach, we make an extension of the model mentioned above for assessing the projects in the portfolio simultaneously. Whereas in the second approach, based on Monte Carlo simulation, we simulate the joint evolution of the projects of the portfolio, taking into account the individual assessment, carried out in accordance with the reference model, and the budget constraint. To test the proposed evaluation procedures, we generated