Growth options and investment under uncertainty

The options approach to capital investment has extended the conventional NPV framework to recognize the dynamic and flexible nature of investment decisions. While the real options literature recognizes that the lost value of an option is part of the cost of capital investment, it has not paid much attention to the other side of the conventional NPV rule---the value of capital investment. In general, it is assumed that the value of investment has one component, and its dynamics is given.; In this thesis we derive the value of an investment in information technology (IT) by aligning it with the firm's future capacity expansion, and develop an approach to the investment decision of the firm by decomposing the value of the IT investment into two components: the value of assets in place and the growth options. Our approach not only recognizes the option-like characteristics of the investment opportunities, but also recognizes the option-creating characteristics of the investment. Furthermore, our approach recognizes the dynamic characteristics of different sources of the value of the investment and their impacts on investment decision.; Our research shows that the IT investment affects the firm by affecting its assets already in place and its assets not yet in place, i.e. growth options. The value of the IT investment is the sum of the two parts: the incremental value of the assets in place and the incremental value of the growth options. The incremental value of the assets in place and the incremental value of the growth options have different dynamic characteristics. This difference may affect IT investment decision making. Our analysis yields insights into how the IT investment affects the sources of the firm's value and their roles in the IT investment decision making.; Finally, we develop a quasi-analytic approach to solving for the value of investment opportunity and the investment strategy in a finite time horizon, and provide a continuous solution to the optimal investment policy.