Multi-stage IT project evaluation: The flexibility value obtained by implementing and resolving Berk, Green and Naik (2004) model

Authors:
Fathi Abid;Dorra Guermazi
Affiliations:
University of Sfax-Tunisia, Research Unit: MODESFI, Faculty of Business and Economics, Road of the Airport Km 4. 3018 Sfax, Tunisia;University of Sfax-Tunisia, Research Unit: MODESFI, Faculty of Business and Economics, Road of the Airport Km 4. 3018 Sfax, Tunisia
Venue:
Journal of Computational and Applied Mathematics
Year:
2009

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Abstract

In this paper, we evaluate a multi-stage information technology investment project, by implementing and resolving Berk, Green and Naik's (2004) model, which takes into account specific features of IT projects and considers the real option to suspend investment at each stage. We present a particular case of the model where the project value is the solution of an optimal control problem with a single state variable. In this case, the model is more intuitive and tractable. The case study confirms the practical potential of the model and highlights the importance of the real-option approach compared to classical discounted cash flow techniques in the valuation of IT projects.