Valuation of technology development using a novel workflow approach to compound real options

A concept study was undertaken to demonstrate how strategic valuation of a micro-sun sensor development could impact decision-making and planning during maturation of technology from proof-of-concept through validation and demonstration. A workflow of activities that retire risk and ensure technology infusion into a targeted system also prescribes a pseudo-decision tree from which comparison of discounted cash flow (DCF) with compound real options valuation is performed to evaluate the strategic value of the maturation phase. The intent is to identify areas where financial modeling may improve decision-making for integration with technology risk assessment, infusion planning, probabilistic cost estimation, schedule uncertainties and program-level decision tree analysis. DCF and option values expectedly are dominated by assumptions and uncertainty. Nonetheless, the latter preliminarily yields a project value distribution that can exceed DCF by up to $40,000 though typically is below $10,000 for this relatively small $800,000 technology development effort over two years.