Evaluating Incremental/Iterative Software Projects by Valuing Investment/Implementation Risks

The optimisation process of scheduling an incremental/iterative software project can be approached as a multi criteria decision problem, formulated by a linear programming model, aimed to propose alternative project schedules and examine cost trade-offs. In this paper, we apply the prominent economic theory of Real Options to analyse project investment risks and discover the economic value associated with each alternative scheduling decision. To justify our approach, we identify two options in an incremental/iterative project plan. The first option is to stall the development at a predefined increment/iteration, while the second is to continue increments and deliver the full system functionality. By calculating the expected value of each option, we provide the project manager with the flexibility to compare candidate schedules and decide, under favourable or unfavourable conditions, the most profitable combination of delivered functionalities.