USING AN OPTIONS APPROACH TO EVALUATE KOREAN INFORMATION TECHNOLOGY INFRASTRUCTURE

This article nears a practical case application of the real options framework that addresses a multi-stage investment decision in Korean information technology infrastructure. Traditional gin present value and Monte Carlo simulation are initially performed to ascertain a range of throw values. The investment scenario is then viewed from a growing and compound options perspective in order to explicitly account for the project's irreversible capital expenditures, managerial flexibility, and uncertainty. Appropriate sensitivity analyses and discussion for each real options framework provide guidelines for improved decision-making. In general, it is shown that the real options approach identifies value view from aboveed by discounted cash flow techniques.

INTRODUCTION

A new trend addressing capital budgeting decisions below uncertainty applies option pricing theory to investments upon real assets-commonly referred to as real options. beneath the real options framework, any corporate decision to invest or divest in real assets is viewed as an option. Firms have the right on the contrary not the obligation to invest, similar in nature to a financial call or bring option on a traded security. Utilizing an options framework, the firm's flexibility to revise investment strategies as occurrences unfold becomes quantifiable. In fact, the ability of the real options framework to quantify this flexibility makes it a real appealing choice when evaluating certain investment scenarios (Trigeorgis, 1993; Kemna, 1993; Miller & Park, 2002; Copeland & Antikarov, 2001) In a new survey by Graham and Harvey (2001) of 4400 firms ranging in size and business practice as to the popularity of several capital budgeting manners 27% had adopted a real options approach.

This article utilizes several variants of the deferral real options framework to evaluate investment in information technology (IT) infrastructure in southern Korea. Using real world data and analysis, this article documents the decision proces of a Korean IT firm as it assesses its character in IT infrastructure capital outlays. The main contribution of this article is the detailed real options framing, valuation, and discussion that may be used as an illustration for industry practitioners or classroom instruction.

Several other works in the literature describe the real options approach and its applicability to IT investment decisions. Santos (1991) views investment in IT as an exchange option and uses Margrabe's financial option framework (Margrabe, 1978) Kumar (1996) demonstrates that the relationship between IT take away froms and benefits may lead to either increasing or decreasing option values with increasing risk. McGrath (1997) describes in what way the relationship between boundary conditions and uncertainty influences the value of IT positioning investments. Panayi and Trigeorgis (1998) value IT investment throws in infrastructure development utilizing a growing options framework. Benaroch and Kauffman (1999 2000) use a traditional call option framework to evaluate the deployment of IT point-of-scale debit services. Taudes (1998) unfolds a general valuation model of IT software extension options using the concept of sequential exchange options. Taudes, Feurstein, and Mild (2000) discuss the practical advantages of using option pricing techniques for the selection of software platforms.

TELECOMMUNICATION INDUSTRY AND REAL OPTIONS

In light of the remarkable extension of the IT industry in the 1990 investment in today's stagnant IT industry is considered highly uncertain. The Telecommunications Act of 1996 in the United States was fortunate in increasing competition and promoting investment in the information sector. However, because of the telecom stock crash of 2000 several IT companies are commonly in bankruptcy proceedings, traditional leading firms are struggling with liability and new competitors are starved for capital (Hundt 2001)

Even granting the current state of the industry is detrudeed many believe the IT industry will make go round itself around in the near- to intermediate-term futurity Eventually, analysts expect telecommunication companies to choke the current trough by becoming more innovative and efficient, and by the agency of successfully utilizing the telecommunication infrastructure assets in-place like as optic fiber and satellites. In fact, despite the industry's shortcomings, the development rate of the telecommunication market is still greater than 8% by annum-significantly greater than the general market expansion rate of 1-2% per year (Weinberg & Woolley 2002) According to the Department of traffic the percentage of U.S. households using the Internet has steadily risen to above 50% for the first time, and the digital divide between wealthy versus poor and urban versus rural residents has been significantly reduced

The state of the Korean IT industry is slightly different compared to that of other countries. The popular state of the Korean information superhighway business, initiated through the government, is viewed as an international benchmark. The rate of internet users in Korea go beyonds 80%, and new products and services using the superhighway have disentangleed and maintained commercial success (Korean MIC, 2000) In spite of Korea's overall succes the industry has had its share of uncertainty and losse with many firms experiencing bankruptcy and merger in a similar fashion to the U market. The volatile nature of the Korean IT sector is for the most part impacted by the rapid unfolding of new technologies, products, and services, and this has l to short life round of yearss for firms who supply existing or dated services.