The valuation of modular projects: A real options approach to the value of splitting

This paper presents a real option approach to the valuation of modular projects, focusing on the value of splitting. Building upon the Baldwin and Clark [Baldwin, Carliss Y & Clark, Kim B. (2000). Design rules - volume 1: The power of modularity. MIT Press, Cambridge, Massachusetts] approach to modularity, it proposes a more general model, which includes the possibility of delaying the option to split, the effect of correlated 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 and 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. (C) 2007 Elsevier Inc. All rights reserved.