This work presents a novel option pricing method to evaluate R&D projects, an area that has received considerable attention in recent years. As the underlying assets, e.g. R&D projects, are usually non-tradable, this work examines a “twin” or “surrogate” traded asset
whose price process is highly correlated with that of a non-traded underlying asset. Based on the observable market price of the surrogate asset, the proposed model can price the value of a real option underlying the non-traded R&D projects. The proposed model differs from previous ones mainly owing to its ability to deal with highly complex situations, e.g. the compound effect and the non-tradability of R&D projects, when evaluating them.