Valuing Modularity as a Real Option

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

See all articles by Andrea Gamba

Andrea Gamba

University of Warwick - Finance Group

Nicola Fusari

Johns Hopkins University - Carey Business School; Northwestern University - Kellogg School of Management

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

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

Andrea Gamba (Contact Author)

University of Warwick - Finance Group ( email )

Scarman Road
Coventry, CV4 7AL
Great Britain
+44 (0)24 765 24 542 (Phone)
+44 (0)24 765 23 779 (Fax)

Nicola Fusari

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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