Valuing Modularity as a Real Option

We provide a general valuation approach for capital budgeting decisions involving the modularization in the design of a system. Within the framework developed by Baldwin and Clark (Baldwin, C. Y., K. B. Clark. 2000. Design Rules: The Power of Modularity. MIT Press, Cambridge, MA), we implement a valuation approach using a numerical procedure based on the least-squares Monte Carlo method proposed by Longstaff and Schwartz (Longstaff, F. A., E. S. Schwartz. 2001. Valuing American options by simulation: A simple least-squares approach. Rev. Financial Stud. 14(1) 113–147). The approach is accurate, general, and flexible.

• 저널Management Science · 55(11) · 1877–1896
• 토픽Capital Investment and Risk Analysis · Finance
• DOI10.1287/mnsc.1090.1070
• 저자Andrea Gamba, Nicola Fusari