Valuing Modularity as a Real Option

Gamba, Andrea; Fusari, Nicola

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Valuing Modularity as a Real Option

Management Science, Forthcoming

Swiss Finance Institute Research Paper No. 08-20

WBS Finance Group Research Paper No. 86

51 Pages Posted: 29 Jan 2008 Last revised: 23 Dec 2019

See all articles by Andrea Gamba

Nicola Fusari

Johns Hopkins University - Carey Business School

Date Written: July 9, 2009

Abstract

We provide a general valuation approach for capital budgeting decisions involving the modularization of a system. Within the framework developed by Baldwin and Clark (2000), we implement an approach using a numerical procedure based on the Least Squares Monte Carlo method proposed by Longstaﬀ and Schwartz (2001). The approach is accurate, general and flexible.

Keywords: Real options, Modularity, Least Squares Monte Carlo

JEL Classification: G12, G31

Suggested Citation: Suggested Citation

Gamba, Andrea and Fusari, Nicola, Valuing Modularity as a Real Option (July 9, 2009). Management Science, Forthcoming, Swiss Finance Institute Research Paper No. 08-20, WBS Finance Group Research Paper No. 86, Available at SSRN: https://ssrn.com/abstract=1088324