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Valuation of project portfolios: An endogenously discounted method

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  • Zapata, Juan C.
  • Reklaitis, Gintaras V.

Abstract

Real options analysis (ROA) has been developed to value assets in which managerial flexibilities create significant value. The methodology is ideal for the valuation of projects in which frequent adjustments (e.g. investment deferral, project scope changes, etc) are necessary in response to the realization of market and technological uncertainties. However, ROA has no practical application when valuing portfolios of multiple concurrent projects sharing resources, as the size of the problem grows exponentially with the number of projects and the length of the time horizon. In this paper an extension of ROA suitable for the valuation of project portfolios with substantial technological uncertainty (e.g. R&D portfolios) is proposed. The method exploits the distributed decision making strategy encountered in most organizations to decompose the portfolio valuation problem into a decision-making sub-problem and a set of single project valuation sub-problems that can be sequentially solved. Discrete event simulation is used for the first sub-problem, while a tailored ROA based strategy is used for the set of valuation sub-problems. A case study from the pharmaceutical industry is used to compare the decision tree analysis (DTA) method and the proposed method.

Suggested Citation

  • Zapata, Juan C. & Reklaitis, Gintaras V., 2010. "Valuation of project portfolios: An endogenously discounted method," European Journal of Operational Research, Elsevier, vol. 206(3), pages 653-666, November.
    • Handle: RePEc:eee:ejores:v:206:y:2010:i:3:p:653-666
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    References listed on IDEAS

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    Cited by:

    1. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    2. Jonathan Linton & Nicholas Vonortas, 2015. "From Research Project to Research Portfolio: Meeting Scale and Complexity," Foresight and STI Governance (Foresight-Russia till No. 3/2015), National Research University Higher School of Economics, vol. 9(2), pages 38-43.

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