Investment in Electronic Commerce - A Real Options Approach
AbstractIn recent years substantial investments have been made in eCommerce projects. Some of them seem to have been profitable. In other cases there has not yet been enough demand to generate a cash flow large enough to guarantee a financial viability of the projects. The purpose of this project is to develop a set of methods to be used in order to evaluate investments in eCommerce given an uncertain demand. eCommerce investments are sequential in the meaning that initial “platform” expenditures for web services are to be followed by substantial outlays for marketing. In this paper a real options approach is used for their evaluation. Sales and sales income will be described in terms of a binomial process with declining growth rates. A decision to stop the investments in marketing is assumed to put a cap on that growth. The paper shows that the real options approach is a suitable procedure to evaluate sequential decisions concerning investments in eCommerce. The method is applied on a real case study from a Swedish firm. It is demonstrated that the classical approach of adjusting the discount rate for risk may give quite misleading results.
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Bibliographic InfoPaper provided by University of Gothenburg, Department of Business Administration in its series FE rapport with number 2003-402.
Length: 25 pages
Date of creation: 30 Dec 2003
Date of revision:
Contact details of provider:
Postal: Dept of Business Adminstration, School of Business, Economics and Law, University of Gothenburg, Box 610, SE 405 30 Göteborg, Sweden
Web page: http://www.handels.gu.se/fek/
More information through EDIRC
eCommerce; sequential investments; flexibility; declining growth rate; real options; case study;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-01-12 (All new papers)
- NEP-FIN-2004-01-12 (Finance)
- NEP-MAC-2004-01-12 (Macroeconomics)
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