Strategic Investment Planning by Using Dynamic Decision Trees

In this paper we shall represent strategic planning problems by dynamic decision trees, in which the nodes are projects that can be deferred or postponed for a certain period of time. Using the theory of real options an enhanced option pricing method is provided, where the relationship of investments is taken into consideration as well, and the optimal path of the decision tree, i.e. the path with the biggest real option value in the end of the planning period will be identified. The theory developed implicitly contains not only the deferral or cancellation flexibility of projects but also the possibility of considering vague informations, which needs to be taken into account when (long-time range) financial decisions are made.