REAL OPTIONS VALUATION OF E-LEARNING PROJECTS

Abstract

New information and communication technologies are gaining widespread use in Distance Education (DE) models. In addition to that, the uncertainty in the market demand for this form of higher education is such that the valuation of e-learning projects have become increasingly difficult and complex. This is due to the fact that uncertainty and flexibility are central to DE projects, and the traditional valuation models such as the discounted cash flow (DCF) fail to capture the value of the management flexibility that is inherent in this type of project. In order to verify an alternative valuation methodology, we analyze a typical college level MBA DE project and show how option pricing methods can be used to determine both the value of the project and the optimal investment strategy. We develop a real options model which allows the management team to optimize their strategy during the decision making process, considering that the managers have the option to postpone project implementation for a limited period of time. We conclude that the use of this methodology allows for a more comprehensive valuation of the strategic flexibilities that exist in this class of project, improves the quality of managerial decisions and reduces the investment risk under uncertainty.