ICAT investment appraisal using real options

Authors:
Georgios N. Angelou;Anastasios A. Economides
Affiliations:
Information Systems Department, University of Macedonia, Thessaloniki, Greece;Information Systems Department, University of Macedonia, Thessaloniki, Greece
Venue:
ICCOMP'06 Proceedings of the 10th WSEAS international conference on Computers
Year:
2006

Citing 3
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Abstract

Traditional investment appraisal approaches, such as discounted cash flow and net present value (NPV) do not capture the flexibility in the investment deployment strategy. In this paper, we use Real Options (ROs) to capture the value of flexibility in the evaluation of a real-life telemetry and automation investment, for a water management utility company. The investor is faced with the problem of valuing "expansion" as well as new "implementation opportunities" based on the initial base scale of an Information, Communication and Automation Technology ICAT infrastructure. The results prove that ROs evaluation can increase profitability of investments, especially in cases where their NPV value is negative or marginally positive.