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Investment Under Uncertainty in Information Technology: Acquisition and Development Projects

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Author Info

  • Eduardo S. Schwartz

    ()
    (Anderson Graduate School of Management, University of California--Los Angeles, Los Angeles, California 90095-1481)

  • Carlos Zozaya-Gorostiza

    ()
    (Instituto Tecnológico Autónomo de México, Río Hondo #1, México D.F. 01000, México)

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    Abstract

    In this paper, we develop two models for the valuation of information technology (IT) investment projects using the real options approach. The IT investment projects discussed in this paper are categorized into development and acquisition projects, depending upon the time it takes to start benefiting from the IT asset once the decision to invest has been taken. The models account for uncertainty both in the costs and benefits associated with the investment opportunity. Our stochastic cost function for IT development projects incorporates the technical and input cost uncertainties of Pindyck's model (1993), but also considers the fact that the investment costs of some IT projects might change even if no investment takes place. In contrast to other models in the real options literature in which benefits are summarized in the underlying asset value, our model for IT acquisition projects represents these benefits as a stream of stochastic cash flows.

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    File URL: http://dx.doi.org/10.1287/mnsc.49.1.57.12753
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 49 (2003)
    Issue (Month): 1 (January)
    Pages: 57-70

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    Handle: RePEc:inm:ormnsc:v:49:y:2003:i:1:p:57-70

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    Related research

    Keywords: investment under uncertainity; real options; information technology; acquisition and development projects;

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    Cited by:
    1. van Soest, Daan P., 2005. "The impact of environmental policy instruments on the timing of adoption of energy-saving technologies," Resource and Energy Economics, Elsevier, vol. 27(3), pages 235-247, October.
    2. TINA M. Edgar A. Ghossoub, . "Economic Development and the Welfare Costs of Inflation It has been widely observed that the role of money in the ?nancial system varies across developing and advanced countries. While the connections," Working Papers 0034, College of Business, University of Texas at San Antonio.
    3. Cassimon, D. & De Backer, M. & Engelen, P.J. & Van Wouwe, M. & Yordanov, V., 2011. "Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity," Research Policy, Elsevier, vol. 40(9), pages 1200-1216.
    4. Christian Ullrich, 2013. "Valuation of IT Investments Using Real Options Theory," Business & Information Systems Engineering, Springer, vol. 5(5), pages 331-341, October.
    5. Moon, Yongma & Yao, Tao & Park, Sungsoon, 2011. "Price negotiation under uncertainty," International Journal of Production Economics, Elsevier, vol. 134(2), pages 413-423, December.
    6. Marc Bollecker & Wilfrid Azan, 2008. "Les frontières de la recherche en contrôle de gestion : une analyse des cadres théoriques mobilisés," Post-Print halshs-00522395, HAL.
    7. Jorgensen, Steffen & Kort, Peter M. & Dockner, Engelbert J., 2006. "Venture capital financed investments in intellectual capital," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2339-2361, November.

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