Funding decisions for multi-stage projects

Abstract

Large industrial projects are generally organized and funded in stages, with each stage funded and executed sequentially. This is widely practiced with new product and new technology development projects, venture capital projects, and natural resource development projects. It is required and regulated for pharmaceutical projects. Continued funding of a project generally requires the successful completion of a stage. The methods used to value multi-stage projects are derived from the fields of finance and engineering economics. Traditional valuation techniques for multi-stage projects are based on decision trees; this is the primary method taught to engineering students. Proponents of real options have suggested that options analysis more closely follows the assumptions used in actually funding a project, but these new methods have other, unresolved problems. © American Society for Engineering Education, 2010.