Valuing investments in technology under uncertainty:a real options approach.

Abstract

This thesis highlights the importance of real options valuation for evaluating the true value of projects that are subject to uncertainty in the future. This is in contrast to the traditional evaluation strategies, such as discounted cash flow analysis, internal rate of return analysis, cost benefit analysis, Monte Carlo simulation based probabilistic models, scenario based analyses etc., that have been used in the past to value projects that are drawn years in advance. These traditional methods were many times ineffective in capturing the complete risk and the flexibility of the decision making process. The true value of technology investments that are subject to future uncertainty can only be evaluated effectively by incorporating decision flexibility during valuation. The research throws light on the recent developments in the Real Options analysis field and compares and contrasts different methods, techniques and insights that have been proposed by leading researchers in the field. The thesis aims at ways by which engineering managers can effectively evaluate project risks and gained value using a real options approach. The real option method is demonstrated using a case study on the acquisition of Numonyx by Micron Technology Inc. (NASDAQ:MU) in May 2010. Under assumptions it has been shown that by incorporating managerial flexibility in the valuation provides a better estimate compared to traditional discounted cash flow techniques.