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.
* performace other success probability of New proudct development Project performance research POP success probability of : pot → Pot ) V:(CFI) - TE MANAM manufacture (F) ир. . O 0 other researches (total) give up O х give up Performance х o other Successo CFR = CF x U2 х х o 0 0 X give up proceed performance other Fail(x) o O O up CF1 CF x U х give up х performance CF2 -Co-Cot = CFxUXD O х O X O performance proceed other X X х CFW O O CF up -Co-Cat = CFD = CF x U2 O х proceed X O х CFaw performance х V:(CF1p) - lp Decision node = CF XU XD manufacture (F) O Chance node 0 х give up End node Due (max N tries=N-year research)