Returns to Investment in Virtual Reality (VR): project (e)valuation in Hong Kong

Abstract:

Being one of the emerging technologies, Virtual Reality (VR) has come to the one’s attention as one of the hottest investments. Apart from the market, academics start to attach a price or justify
any capital budgeted to VR. This study therefore reveals how could the potentials of VR be unleashed -- capturing the value and understanding the market outlook of VR. In particular, the
focus lies in a project-level (e)valuation locally in Hong Kong.

By taking advantage of the analogy between Engineering and Economics, the two disciplines indeed complement each other to achieve a synergy in the extensive discussion of VR investment. This paper first summarizes the three types of valuation methods commonly used in the investment literature, followed by a further development on one of the three -- simulation and computation, in which a comparative study is conducted among Net Present Value (NPV), Decision Tree and Real Options Value (ROV). Taking managerial flexibility and deferred decisions for granted in the context of VR project management, the paper later on evolves the ROV approach, where the novelty of this research comes in.


Using the analytical framework developed by Economics, this paper adopts a principal-agent model to investigate and design an implicit (intergenerational) contract between suppliers and demanders in a VR project along the supply chain. Horizontally integrated -- a multistage and multi-vendor workflow is modelled with the use of ARENA and VBA for simulation and replication purposes. Ultimately, a profit-sharing scheme is introduced where the taker has to pay back to the giver in return or R&D investment, under an optimal payback ratio in order to optimize the operation of such a feedback mechanism.