1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

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