Home  Journals  Financial Analytics: Science and Experience  31(265) - 2015 August

Analyzing multistage investment projects as governance models

Vol. 8, Iss. 31, AUGUST 2015

Article PDF Version

Received: 29 June 2015

Accepted: 13 July 2015

Available online: 4 September 2015

Subject Heading: MATHEMATICAL ANALYSIS AND MODELING IN ECONOMICS

JEL Classification: 

Pages: 15-26

Importance Traditional methods for evaluating investment projects can underestimate projects, which imply any changes in decision according to new information. The ability to change a decision or response to risks plays an important role in multistage investment projects. The research regards multistage projects as governance models and determines the value of the ability to manage. The outcome of the proposed model correlates with those of the theory of real options.
     Objectives The research aims at examining the model for evaluating flexible projects; conducting a comparative analysis of the models; formulating the objective of evaluating multistage projects as governance models; verifying the outcome of the model with an illustrative example, and scope of its applicability.
     Methods Using mathematical modeling, I demonstrate the effect of investment flexibility at various stages of a multistage investment project.
     Results It is a valuable possibility to alter decisions according to new information. Value can be estimated with various approaches, i.e. a scenario analysis and simulation modeling. Flexible multistage projects can be presented as compound real options or governance models. In assessment, it is impossible to definitely evaluate a possibility to alter a decision at each stage of an investment project. Value is higher when the decision gets changed timely upon receipt of new information.
     Conclusions and Relevance In evaluating multistage investment projects, it is necessary to consider the controllability of risks. The project type, quality and availability of input data determine the method for evaluating risk response possibilities. The proposed model can be used in evaluating flexible investment projects in R&D, oil and gas or information technologies.

Keywords: risk management, dynamic programming, compound options, project analysis

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