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
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: Suggested Citation