Valuation of R&D investment under technological, market, and rival preemption uncertainty

We develop a real options model for evaluating and optimizing a research and development (R&D) project. The model captures key features of R&D, including research duration, growth opportunity, debt financing, and uncertainty of technology, demand market, and rival preemption. In the model, we unveil the interactions of key R&D features. The effect of duration on investment depends on whether there is rival preemption. Higher uncertainty of research duration speeds up investment in the presence of rival preemption. Higher uncertainty of technological success, combined with a growth opportunity, accelerates investment. Debt financing greatly decreases time lag between the first stage project and growth project.