USING AN OPTIONS APPROACH TO EVALUATE KOREAN INFORMATION TECHNOLOGY INFRASTRUCTURE

Abstract

This article presents a practical case application of the real options framework that addresses a multi-stage investment decision in Korean information technology infrastructure. Traditional net present value and Monte Carlo simulation are initially performed to ascertain a range of project values. The investment scenario is then viewed from a growth and compound options perspective in order to explicitly account for the project's irreversible capital expenditures, managerial flexibility, and uncertainty. Appropriate sensitivity analyses and discussion for each real options framework provide guidelines for improved decision-making. In general, it is shown that the real options approach identifies value overlooked by discounted cash flow techniques.