Identifying an optimal start-up date for information technology projects: a real options approach

Abstract

Summary form only given. Under conditions of uncertainty, investment flexibility is an important and valuable consideration. There is a growing view that the techniques used to evaluate financial options might be appropriate in certain circumstances for evaluating capital investments that have option like characteristics. These types of investment choices are often referred to as real options as the investment opportunities typically involve real assets (information systems, factories, new products, etc.) rather than paper-based assets (stocks, bonds, currencies, etc.). One significant aspect of this research is the use of a real options approach to determine the optimal start-up date of IS investments. The approach reported here draws an analogy between the impact of stock dividends on the early exercise of American style call options and foregone project cash flow and investment deferral. This approach has significant advantages over other valuation methods that are based on options pricing theory.