The Valuation of Modular Projects: A Real Options Approach to the Value of Splitting

33 Pages Posted: 18 Apr 2007 Last revised: 9 May 2018

See all articles by Artur Rodrigues

Artur Rodrigues

University of Minho - NIPE and School of Economics and Management

Manuel J. Rocha Armada

University of Minho

Date Written: 2007

Abstract

This paper presents a real options approach to the valuation of modu- lar projects, focusing on the value of splitting. Building upon the Baldwin and Clark (2000) approach to modularity, it proposes a more general model, which includes the possibility of delaying the option to split, the effect of cor- related values and assumes a multi-staged product development. We study the impact of some of the variables which influence the optimal modular strategy, such as the value, risk ans cost of each modular configuration and their correlations. Part of the value of modularity can be attributed to the option to choose the best of alternative standards, which can exist without modularising the project.

Keywords: Modularity, Real Options

JEL Classification: D81, G31

Suggested Citation

Rodrigues, Artur and Rocha Armada, Manuel José, The Valuation of Modular Projects: A Real Options Approach to the Value of Splitting (2007). Global Finance Journal 18(2), 205–227, Available at SSRN: https://ssrn.com/abstract=980937

Artur Rodrigues (Contact Author)

University of Minho - NIPE and School of Economics and Management ( email )

School of Economics and Management
Braga, 4710-057
Portugal

Manuel José Rocha Armada

University of Minho ( email )

Sch. Economics & Bus Administration
Gualtar
Braga, MINHO 4710-057
Portugal
+351 253 60 44 55 (Phone)

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