Using Real Options Discipline for Highly Uncertain Technology Investments

摘要: Here's a methodology and investment discipline you will need for convincing CFO that your proposal promising though uncertain project is prudent. OVERVIEW: Existing methodologies offer little help in selecting among technology investments. However, Discovery Driven Planning conjunction with Real Options Discipline allows managers to make aggressive investments while maintaining fiduciary responsibility. provides an effective way plan when there true ambiguity about their prospects. yields more selection method than offered by standard net present value calculations, which tend reject high potential but outcomes. When combined, the two create of managing highly projects order capture limiting costs. KEY CONCEPTS: real options, uncertainty, valuation, discovery-driven planning. A combination advancing technology, globalization competition market turbulence, pushing firms increasingly ambiguous CFOs senior management, besieged requests funds support proposals, simultaneously Those able develop evaluating pursuing are rich opportunity, controlling risk, inevitably newer technologies timid competitors. By technologically outpacing peers, these be rewarded breakthroughs turn bring investor recognition form higher valuations. In this article, we argue applying select, evaluate, projects, CTOs can begin propose uncertain, strategically important areas, at same time assuring We start stressing initially no for, nor sense in, recommending mass implementation our approach-the best line attack apply process few pilot purpose systematically learning whether it effectively address issues facing firm. The Problem DCF combined well-executed Plan enable company improve its overall commercialization success rate making deliberate, low-cost "test investments" demonstrate plausibility development large upside chances success. such cases, discounted cash flow analysis (DCF) often suggests should disallowed. To understand why happens let's revisit basics analysis. It begins prediction expected values inflows outflows life project. Next, requires: 1. calculation each year. 2. Discounting year's back present, using risk-adjusted discount reflects project's uncertainty. 3. Adding up flows subtracting arrive (NPV). If greater zero, justified. NPV perfectly appropriate always used certain. But what if outcome uncertain? Then flaw doing complex requirement estimate all different outflows, then value. implicitly assumes once approved, those automatically take place, eliminates flexibility. …