Real Options Valuation of R&D Investments. The Case of Floating Offshore Wind Technology in the UK.

Kristina Kolchedantseva

Student thesis: Master thesis


The purpose of this thesis is to investigate the possibility of developing a real options valuation model to improve the valuation of R&D investments. Such investments are considered high risk and include various kinds of options in the decision-making process. The research presented in this thesis is based on a case study of floating offshore wind technology in the UK. For the UK to achieve its high renewable targets, the development of floating offshore wind technology is necessary. This topic is increasingly becoming a point of attention for the UK government and policy-makers. Before the valuation the theoretical discussion is undertaken to create a deeper understanding of the reasoning behind different valuation models, more specifically the discounted cash flow (DCF) and the real options model. The thesis has therefore both a theoretical and practical scope. However, the emphasis of the thesis is on the practical application of the models to the case study. The analysis aims to quantify the economic value of R&D in floating offshore wind in the UK. The traditional DCF model has been applied, but it appears insufficient due to the significant limitations of the methodology. The deterministic DCF approach to the valuation of R&D significantly underestimates the value of the R&D investments in floating offshore wind technology. It is crucial in the valuation of R&D investments to capture value derived from changing market conditions and managerial flexibility to change the course of action, and the DCF model is not fully capable to account for the value of those. The real options valuation is performed to account for market uncertainty and value generated from managerial flexibility, as opposed to the DCF model. It shows that the additional value can be captured using the real options analysis, making this approach appropriate for the valuation of floating offshore wind R&D projects, under the examined circumstances. It has been concluded, that the real options model is better for valuing the R&D investments than the DCF model, based on its superiority in handling uncertainty and flexibilities. In the analysis the binomial model is used for the valuation of real options. It allows deriving an optimal decision tree, where the decision depends on timing and market uncertainty. Such analysis helps the policy-makers with strategic decisions. The analysis also demonstrates the possibility of implementing real options valuations in a meaningful way by practitioners. However, while it is possible to develop theoretically advanced valuation models, their practical value can be debated based on the difficulties of finding reliable estimates for input parameters. Therefore, the final numerical results are highly influenced by the input assumptions made throughout the thesis that can be a subject for further research.

EducationsMSc in Business Administration and Mathematical Business Economics, (Graduate Programme) Final Thesis
Publication date2020
Number of pages93