NASA technology assessment using real options valuation

Abstract

We examine the use of real-options valuation in the context of prioritizing advanced technologies for NASA funding. Further, we offer a set of computational procedures that quantifies the option value of each technology. Other researchers have applied a real-options framework to private sector investments. In the case of NASA investments in advanced technologies, the underlying products, which must be used to justify the investments, are nearly pure public goods-in particular, space-related scientific results and discoveries to be shared worldwide. As in the private sector, uncertainty plays a significant role in the motivation to use real options in NASA. Uncertainty in NASA technology investments can be classified as development risk and programmatic risk (whether missions using the technology will actually fly). The latter might be called the technology's "market risk."We carried out the approach on a number of planetary exploration technologies. We illustrate the detailed calculations using one of them  lightweight propellant tank technology.

Technology Decisions Under Architectural Uncertainty: Informing Investment Decisions Through Tradespace Exploration

“…The use of real-options modeling has been implemented for technology evaluation [3,4] and technology portfolio definition [5]. This tool is particularly useful in incorporating the extreme uncertainty associated with the resources required for maturation of technology through NASA's development efforts.…”

“…For example NASA's Office of the Chief Technologist has presented a specific technology prioritization based on the NASA Mars Design Reference Architecture (DRA) 5.0 [1,2]. Existing space technology portfolio literature has focused on implementing financial techniques to evaluate technology alternatives and manage investments accordingly [3][4][5]. Other work seeks to combine nonfinancial attributes within a single assessment and selection framework [6].…”

Defining changeability: Reconciling flexibility, adaptability, scalability, modifiability, and robustness for maintaining system lifecycle value

“…Other types of uncertainty also exist, both regarding past and present factors affecting system value. Instead of motivating flexibility as a response to uncertainty [Shishko et al, 2004;Wilds et al, 2007], the present work is motivating changeability as a response to inevitable change , which is a primary salient issue in concerns with uncertainty. Building changeability into systems admits the inability to accurately predict the future, while embracing the Bayesian technique of constantly improving estimates given new information.…”

A real options framework for space mission design

“…5 -The value of the option is the expected NPV using the binomial 2 An unresolved issue here concerns whether NASA (as a government agency) should be risk-neutral altogether without regard to whether uncertainties can be hedged (with a traded twin security) or not. Following in the footsteps of [1] we also take the viewpoint that "the public goods aspect of NASA investments suggests that NASA should be risk-neutral in valuing its R&D projects, thus validating the use of a riskless discount rate". decision-tree model with integrated real option minus the expected NPV using the conventional binomial event tree model and is given by: $460 M -$320 M = $140 M. Fig.…”

“…Application of real options analysis typically requires that assumptions be made about one or more of the four economic elements. Important past work, especially as related to NASA, includes [1], where the authors examine the use of real options valuation in the context of prioritizing advanced technologies for NASA funding and offer a set of computational procedures that quantifies the option value of each technology.…”