Valuing interdependent multi-stage IT investments: A real options approach

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Abstract

In this paper, we use the market asset disclaimer assumption and develop a binomial lattice based real options model to include cash flow interdependencies between multi-stage information technology (IT) investments. Using a simple two-stage IT investment problem with interdependent cash flows, we apply the binomial lattice based real options model to obtain combined valuation of the two-stage IT investment. In addition to investment valuation, our experience with the two-stage IT investment valuation suggests that the binomial lattice based real options model provides a powerful decision aid tool for appropriate timing, delaying and abandoning of the second-stage IT investment.

Original languageEnglish (US)
Pages (from-to)847-859
Number of pages13
JournalEuropean Journal of Operational Research
Volume201
Issue number3
DOIs
StatePublished - Mar 16 2010

All Science Journal Classification (ASJC) codes

  • Computer Science(all)
  • Modeling and Simulation
  • Management Science and Operations Research
  • Information Systems and Management

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