Capital budgeting for interrelated projects: A real options approach

Paul D. Childs, Steven H. Ott, Alexander J. Triantis

Research output: Contribution to journalArticlepeer-review

80 Scopus citations

Abstract

This paper explores the effect of project interrelationships on investment decisions and project values in a real options framework. We examine in detail the mutually exclusive case where a firm may invest in the development stage of two projects and then may select only a single project to implement. The firm can develop the projects in parallel or in sequence. The choice of development policy depends on the relative values of the embedded options for each strategy. Sequential development is shown to be superior to parallel development when projects have highly correlated values, and when they require a large commitment of capital for development, are short term in nature, and have relatively low volatility. We also show that the optimal ordering of sequential projects does not always begin with the most profitable project.

Original languageEnglish
Pages (from-to)305-334
Number of pages30
JournalJournal of Financial and Quantitative Analysis
Volume33
Issue number3
DOIs
StatePublished - Sep 1998

Bibliographical note

Copyright:
Copyright 2018 Elsevier B.V., All rights reserved.

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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