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.

Additional information

Notes on contributors

Luke Miller

Luke T. Miller has experience as an operations research analyst and program manager as a captain in the United States Air Force ([email protected]). His work experience includes statistical modeling and analysis, scheduling, optimization, and decision analysis. He is a graduate of the University of Virginia (BS) and Auburn University (MS, PhD). His main research interests are in real options, financial engineering, economic decision analysis, and corporate finance.

Sung H. Choi

Sung Ho Choi ([email protected]) is currently an associate professor of Industrial Engineering at Kangnung University. Dr. Choi received his BA in economics from Yonsei University, MS and PhD degrees in Industrial Engineering from Korea Advanced Institute of Science and Technology. Before joining the faculty at Kangnung University, he was a senior research scientist at Electronics and Telecommunications Research Institute (ETRI). His current research interest lies in the area of engineering economics, financial engineering and telecommunication economics. He is a co-author of Engineering Economics (Korean) published by Youngchi, 2004.

Chan S. Park

Chan S. Park ([email protected]) is currently a Samual Ginn Distinguished Professor of Engineering at Auburn University. Over his 25-year academic career, he has been actively involved in a variety of research, teaching, and professional consulting on the subject matters. As a leading authority on engineering economics, his work has been recognized internationally in the fields of engineering economics. His current research interest ranges from strategic and economic decisions, financial engineering (real options valuation), to energy modeling (electrical power). He also authored or coauthored several leading textbooks on the subjects including Fundamentals of Engineering Economics (Prentice Hall, 2004), Contemporary Engineering Economics, 3rd ed. (Prentice Hall, 2002), and Advanced Engineering Economics (John Wiley, 1990). He received his Industrial Engineering degrees from Purdue and Georgia Institute of Technology (PhD), respectively. He is also a licensed Professional Engineer in the State of Florida, and was the Editor-in-Chief for The Engineering Economist between 1997 and 2003.