A model for valuing new technologies under a pull incentives environment

In this article we propose an adaptation of a real option model for valuing R&D projects where we incorporate a pull incentive for the final product using a market sales function that decreases in time and is strictly positive over the product׳s life cycle. We apply this model to the case of the development of a Power Line Communication modem (PLC) for Smart Grids in the Brazilian electricity market, where a power utility firm agreed to bear part of the development risk by means of a minimum guaranteed demand, and solve using Monte Carlo simulation. The results suggest that this guarantee has significant impact on the project value, which is not captured by traditional valuation methods or even real option methods that do not incorporate this concept.