A fuzzy approach to compound R&D option valuation

This paper proposes to apply fuzzy sets theory to extend the Geske model to evaluate compound option in a R&D project. Due to the uncertainty of market and technology environment, some input parameters in the Geske model can't always be precise. Therefore, the fuzzy number helps us a lot to estimate the expenditures and future cash flows regarding a R&D project. The fuzzy pattern of compound R&D option formula is derived in this paper. This enables the management, who is with an acceptable belief degree, to make the R&D investment decision on the basis of reasonable and practical data. The meaning and properties of the model result are discussed in a numerical example.