Dynamic Programming Approach to Optimize Portfolio of Interdependent IT Projects

Optimal Selection of interdependent IT Projects for implementation in multi periods has been challenging in the framework of real option valuation. This paper presents a mathematical optimization model for multi-stage portfolio of IT projects. The model optimizes the value of the portfolio (Discounted Cash flow value+Real Option Value) within a given budgetary and sequencing constraints for each period. These sequencing constraints are due to time wise interdependencies among projects. Dynamic Programming approach is used to optimize the model This optimization model and solution approach can help IT managers taking optimal funding decision for projects prioritization in multiple sequential periods. The model also gives flexibility to the managers to generate alternative portfolio by changing the maximum and minimum number of projects to be implemented in each sequential period.