Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 1 Introduction of new service, Part III Decision flexibility and real options

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 2 Evaluation of real options Financial option: right, but not an obligation to buy/sell a specified amount of financial asset (stock) at specified price at some future date Real option: right (possibility) but not an obligation to undertake a specified action directed towards enhancement of project value (value of real investment) hedge risks, increase profitability

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 3 Real options Possibilities to undertake actions if they lead to favourable outcome Hedge against uncertainty, increase profitability Option to expand Option to postpone, “wait and see” Option to change/update to different use Option to change/upgrade technology

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 4 What is option value? Difference between expected profit without option and with option Important for investment decisions: project which seems unprofitable without considering real options can become profitable if real options are considered

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 5 Example Case 1. No option to expand, all deployment should be made during phase 1 in order to satisfy demand projections Case 2. Option to expand: two phase deployment in response to changing demand Case 3. Option to upgrade technology for Phase 2 deployment

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 6 No option to expand Find Phase 1 server placement and current demand assignment which maximize expected profit revenuecosts first stage constraints second stage constraints for scenario r

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 7 where revenue costs first stage second stage averaged among scenarios second stage averaged among scenarios

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 8 Option to upgrade technology Find Phase 1 server placement and current demand assignment which maximize expected profit revenuecosts first stage constraints second stage constraints for scenario r

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 9 where revenue costs first stage second stage averaged among scenarios second stage averaged among scenarios

Alexei A.Gaivoronski June 2001 Universita’ degli Studi di Bergamo Corso di dottorato di ricerca 10