Valuation of Research and Development Projects Using Buying and Selling Prices: Generalized Definitions

Abstract

This paper develops generalized versions of the concepts of buying price, selling price, and short selling price by employing abelian groups. Such generalized pricing concepts are especially useful for the valuation of research and development (R&D) projects, which are often characterized by unquantifiable uncertainties and nonnumeric inputs and outputs, such as know-how and intellectual property. Moreover, the generalized definitions are also applicable to the valuation of other kinds of features in the decision setting, such as decision opportunities embedded in R&D projects. To motivate the use of these pricing concepts, we show that the general definitions exhibit several consistency properties. The application of the generalized price definitions to the valuation of R&D projects and decision opportunities embedded in such projects is illustrated through an example.