1. Beyond BS – Application to R&D Decision Making Jonathan D. Linton Power Corporation Professor for the Management of Technological Enterprises University of Ottawa Linton@telfer.uottawa.ca

2. Most people think…

3. But actually: The Black-Scholes formula gives the current value of a European call option, C(St), as: C(St)=StN(d1)-exp{-rt}EN(d2) where d1=[ln(St/E) + (r+s2/2)t]/ssqrt(t) and d2=d1-sqrt(t)

4. Challenges Finding publically traded stock that is identical to R&D project under consideration. Determining current market value of R&D

5. Best way to address these challenges is to avoid them…

6. Determine R&D Value Instead of Cost ScenarioExercise Price (in $B) Cents/kW h (in 2002$) 20 years of introduction, 80% uptime, inflation, 0.4% adoption rate 14,8712.5 20 years of introduction, 80% uptime, inflation, 1% adoption rate 37,1801.7 50 years of introduction, 90% uptime, 1% adoption rate 16,2980.6 See: DH Goldenberg and JD Linton, Energy Risk, January 2006

8. Data from US Military R&D Procurement Contract Reports (Casault, Groen, Linton, 2011, AAAS Annual Meeting)

9. Top 100 R&D Intensive Firms S&P Small Cap (Casault, Groen, Linton, 2011, Working paper)

10. BS is not the Best BS provides better information than traditional capital budgeting (NPV) Cauchy is better Gaussian (BS) due to thick tales There is still room for improvement, however

11. Beyond BS – Onto Exotics Compound options – modelling patents –present value of dames/patent cost ratio should be 55.55 times or greater (Goldenberg and Linton, 2011, under review) Substantial differences between managing projects versus portfolio of projects (Chen and Linton, in-progress) Max-Min option – suggests that competing research projects should be managed dynamically, de-risked early, and opportunities to move assets between competing projects should be identified and carefully managed (Goldenberg and Linton, in-progress).

12. Thank you for your time… any question or comments Jonathan D. Linton University of Ottawa Linton@telfer.uottawa.ca