Managing information technology investments using a real-options approach

Balasubramanian, P.; Kulatilaka, Nalin; Storck, John

doi:10.1016/s0963-8687(00)00038-x

Cited by 61 publications

(31 citation statements)

References 11 publications

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“…Similar to the example in Amran's Real Options (Amram and Kulatilaka 1999) and related work by Kulatilaka (Kulatilaka, Balasubramanian and Storck 1999), the evolution of a protocol stack is viewable as a series of staged investments. Each stage of development creates an option value by providing the choice of whether to continue evolving the stack, and how the protocol suite should change.…”

Section: Staged Development Of the Modulesmentioning

confidence: 88%

Using real options to value modularity in standards

Gaynor¹,

Bradner²

2001

Know Techn Pol

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This paper proposes a model of technology standardization based on modular standards and the effect of market uncertainty on the value of modularity in standards. A real options model quantifies the value of modularity in standards, illustrating that a rational way to standardize some IT technology in uncertain markets is with modular design, end-2-end structure, and proper staging of the standard. Highly modularized standards provide a higher option value because of the ability to select the best modules to change at a fine granularity.

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Section: Staged Development Of the Modulesmentioning

confidence: 88%

Using real options to value modularity in standards

Gaynor¹,

Bradner²

2001

Know Techn Pol

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“…(page 324) Lately, options valuation approach has been proposed as a more suitable alternative for determining the benefits from R&D projects [9]. Options approach deviates from the conventional DCF approach in that it views future investment opportunities as rights without obligations to take some action in the future [3]. The asymmetry in the options expands the NPV to include a premium beyond the static NPV calculation, and thus presumably increase the total value of the project and the probability of justification.…”

Section: Discussionmentioning

confidence: 99%

“…In traditional investment approaches investments activities or projects are often seen as now or never and the main question is whether to go ahead with an investment yes or no [3]. Formulated in this way it is very hard to make a decision when there is uncertainty about the exact outcome of the investment.…”

Section: Probabilistic Real Option Valuationmentioning

confidence: 99%

A fuzzy approach to real option valuation

Carlsson

Fuller

2003

Fuzzy Sets and Systems

204

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To have a real option means to have the possibility for a certain period to either choose for or against making an invetsment decision, without binding oneself up front. The real option rule is that one should invest today only if the net present value is high enough to compensate for giving up the value of the option to wait. Because the option to invest loses its value when the investment is irreversibly made, this loss is an opportunity cost of investing. The main question that a management group must answer for a deferrable investment opportunity is: How long do we postpone the investment, if we can postpone it, up to T time periods? In this paper we shall introduce a (heuristic) real option rule in a fuzzy setting, where the present values of expected cash flows and expected costs are estimated by trapezoidal fuzzy numbers. We shall determine the optimal exercise time by the help of possibilistic mean value and variance of fuzzy numbers. Probabilistic real option valuationOptions are known from the financial world where they represent the right to buy or sell a financial value, mostly a stock, for a predetermined price (the exercise price), without having the obligation to do so. The actual selling or buying of the underlying value for the predetermined price is called exercising your option. One would only exercise the option if the underlying value is higher than the exercise price in case of a call option (the right to buy) or lower than the exercise prise in the case of a put option (the right to sell). In 1973 Black and Scholes [4] made a major breakthrough by deriving a differential equation that must be satisfied by the price of any derivative security dependent on a non-dividend paying stock. For risk-neutral investors the Black-Scholes pricing formula for a call option is

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“…Balasubramanian et al (2000) use the BM and acknowledge the difference between hedgeable market risks and unhedgeable project risks in their approach to valuing an IT infrastructure project. Hilhorst et al (2006) also use the BM to value a multistage IT infrastructure implementation project and consider the risk preference of a decision maker to value unhedgeable risks.…”

Section: (A2'): a Modification Of Assumption (A2) Is First Mentioned mentioning

confidence: 99%

“…They state that, depending on the many parameters, no clear implication on the option value in relation to the standard case of certain dcof can be given. Brennan and Schwartz (1985); Dixit and Pindyk (1994)*; Myers and Majd (1990);Tourinho (1979) Articles where the BSM is used, for example : Benaroch and Kauffman (1999); Benaroch et al (2006); Heinrich et al (2011);Klaus et al (2014); Su et al (2009);Taudes (1998) Uncertain Incomplete Market Certain Childs et al (2001);Guthrie (2007); Henderson (2004;; Hugonnier and Morellec (2007); Merton (1998) Balasubramanian et al (2000; Benaroch and Kauffman (2000); Diepold et al (2011);Hilhorst et al (2006) Dias and Nunes (2011);Dixit and Pindyk (1994); Epstein et al (1998); Ewald and Wang (2007); Metcalf and Hassett (1995);Sarkar (2003); Schwartz (1997) To sum up, in the IS literature we identified some approaches, which modify single assumptions of the BSM and comply with our relaxed assumptions. The same holds for the Finance and Economics literature where we further identified a few approaches that are based on two modified assumptions that comply with our relaxed assumptions.…”

Section: Finance and Economics Literaturementioning

confidence: 99%