Answer Happy

Could you help me build an option value formula from the
binomial option pricing model(with discrete probability factors).
The problem is that I am trying to find out the value function of
R&D project where individual development research(performance,
reliability, yield, etc) must be all accomplished. I made the
sample Binomial tree below to explain the problem situation. I
divided research into 2 types: ‘performance research’ and ‘other
research’ in order to make the situation simpler. I think option
price can be solved by backwarding. You can modify the binomial
tree or the problem if needed.
Idea: when developing new products, R&D process should be
done before manufacturing. Often R&D projects are consist of
multiple development research. So, my goal is to make the value
formula of R&D project( or value or contribution rate formula
of individual research if possible) using real option method.
❖ New proudct development Project success probability of performance research: P→ P¹ 4: success probability of : Pot Pot other researches (total) Performance other Success (0) O O X Q Fail(x) X CF₁ up X =CF X U performance other wwwwwwww CFdw O O = CF x D O X X O X X P give up proceed -Cp-Cot Decision node Chance node End node manufacture (F) give up give up proceed VF (CFU) - IF 0 0 CFup =CF x U² CFw = CFxUX D performance Q X performance Q X performace other wwwwwww 9 0 9 X give up X 0 CF =CF x U² Xx X performance proceed other wwwwwww CF² O O -Cp-Cot = CFxUxD ▸ O X X Q ➤ X X VF (CFU) - IF manufacture (F) 0 give up Due (max N tries=N-year research)