A real options approach to project management

Abstract

When scheduling an uncertain project, project management can wait for additional (future) information to serve as the basis for rescheduling the project. This flexibility enhances the project's value by improving its upside potential while limiting downside losses relative to the initial expectations. Using traditional techniques such as net present value (NPV) or decision tree analysis (DTA) can often lead to misleading results. Instead, a real options analysis should be preferred. The potentials of a real options approach to project management are discussed with an example and future research directions are highlighted.

Acknowledgements

Work was supported by contract grants G.0246.00 and G.0051.03 from the Research Programme of the Fund for Scientific Research — Flanders (Belgium) (F.W.O.-Vlaanderen). The authors thank the referees for a careful and detailed review of this paper.