An approach to the valuation and decision of ERP investment projects based on real options |
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Authors: | F Wu H Z Li L K Chu D Sculli K Gao |
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Institution: | (1) School of Management, Xi’an Jiaotong University, Xianning Road, Xi’an, People’s Republic of China;(2) The University of Hong Kong, Pokfulam Road, Hong Kong SAR, China |
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Abstract: | The risks and uncertainties inherent in most enterprise resources planning (ERP) investment projects are vast. Decision making
in multistage ERP projects investment is also complex, due mainly to the uncertainties involved and the various managerial
and/or physical constraints to be enforced. This paper tackles the problem using a real-option analysis framework, and applies
multistage stochastic integer programming in formulating an analytical model whose solution will yield optimum or near-optimum
investment decisions for ERP projects. Traditionally, such decision problems were tackled using lattice simulation or finite
difference methods to compute the value of simple real options. However, these approaches are incapable of dealing with the
more complex compound real options, and their use is thus limited to simple real-option analysis. Multistage stochastic integer
programming is particularly suitable for sequential decision making under uncertainty, and is used in this paper and to find
near-optimal strategies for complex decision problems. Compared with the traditional approaches, multistage stochastic integer
programming is a much more powerful tool in evaluating such compound real options. This paper describes the proposed real-option
analysis model and uses an example case study to demonstrate the effectiveness of the proposed approach. |
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Keywords: | Enterprise resources planning (ERP) Real option Uncertainty Mixed-integer programming Decision-making |
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