Real options approach for optimal investment decision timing

2002 ◽  
Author(s):  
Jae-Han Lee ◽  
Dong-Joo Lee ◽  
Jae-Hyeon Ahn
Keyword(s):  
Real Options ◽  
Investment Decision ◽  
Optimal Investment ◽  
Real Options Approach

Technological Innovation, Product Life Cycle and Market Power: A Real Options Approach

2015 ◽  
Vol 14 (01) ◽  
pp. 93-113 ◽  
Author(s):  
Johnson T. S. Cheng ◽  
I-Ming Jiang ◽  
Yu-Hong Liu
Keyword(s):  
Life Cycle ◽  
Real Options ◽  
Market Power ◽  
Technological Innovation ◽  
Product Life Cycle ◽  
Investment Decision ◽  
Investment Decisions ◽  
Optimal Investment ◽  
Product Life ◽  
Real Options Approach

This paper employs a real options approach to analyze optimal investment decisions. When investment projects have the characteristics of irreversibility, uncertainty and the option to wait or exit, the traditional net present value (NPV) method would underestimate the value of investment, since it neglects the values of timing and operational flexibility. The distinctive feature of this paper is that the effects of product life cycle (PLC) as well as market power are incorporated into the model. In addition, and different to the approach in Liao et al. [Optimal investment decision and product life cycle: A real options approach, Sun Yat-Sen Management Review 11(3) (2003) 1–36], we introduce the concept of technological innovation into the model. It is shown that the optimal waiting time for the investment is longer than both those in the American call options model of McDonald and Siegel [The value of waiting to invest, Quarterly Journal of Economics 101(4) (1986) 707–727], which does not incorporate dividend yield, and Liao et al. [Optimal investment decision and product life cycle: A real options approach, Sun Yat-Sen Management Review 11(3) (2003) 1–36], but is shorter than that in Dixit and Pindyck's [Investment under Uncertainty (Princeton University Press, Princeton, NJ, 1994)] model, which incorporates dividend yield. Finally, a comparative static is used to analyze the determinants of optimal investment decisions. Our results indicate that the investment-ratio threshold will be higher, and thus the optimal entry time for an investment will be delayed, when (1) the PLC is longer, (2) the uncertainty is greater, (3) the discounting rate is higher, (4) market power is larger, (5) jump size intensity is stronger and (6) the payoff out ratio (R&D/revenue) is larger.

Optimal Investment Decision for Wind Power Projects under Renewable Portfolios Standards in China

2014 ◽  
Vol 521 ◽  
pp. 782-785
Author(s):  
Yi Sun ◽  
Hai Feng Huang ◽  
Jie Han
Keyword(s):  
Wind Power ◽  
Investment Decision ◽  
Optimal Investment ◽  
Electricity Prices ◽  
Policy Makers ◽  
Investment Timing ◽  
Sources Of Uncertainty ◽  
Real Options Approach ◽  
Proposed Model ◽  
Capacity Choice

China government will introduce the Renewable Portfolios Standards (RPS) to promote the wind power accommodation. As a result, investors face three sources of uncertainty, namely, investment costs, electricity prices and subsidies. This paper adopts a real options approach to analyze investment timing and capacity choice for wind power projects considering these uncertainties under RPS. Simulation results indicate that lower investment costs encourage earlier investment, and higher electricity prices and subsidies create incentives for earlier investment and larger capacity of wind power projects. Besides, the proposed model can be used by policy makers to make appropriate policies.

scholarly journals INVESTMENT, IRREVERSIBILITY, AND UNCERTAINTY IN ENERGY BEET–BASED ETHANOL

2016 ◽  
Vol 48 (4) ◽  
pp. 403-429 ◽  
Author(s):  
KASSU WAMISHO HOSSISO ◽  
DAVID RIPPLINGER
Keyword(s):  
Real Options ◽  
Investment Decision ◽  
Market Price ◽  
Decision Rules ◽  
Optimal Investment ◽  
Irreversible Investment ◽  
Energy Beet ◽  
Gross Margins ◽  
Entry Decisions

Abstract:This study evaluates optimal investment decision rules for an energy beet ethanol firm to exercise the option to invest, mothball, reactivate, and exit the ethanol market, considering uncertainty and volatility in the market price of ethanol, feedstock, and irreversible investment. A real options framework is used to compute gross margins of ethanol that trigger entry into and exit from the ethanol market. Results show that volatility in ethanol gross margins has much greater effects on exit and entry decisions than investment costs, and it also causes firms to wait longer before entering the ethanol market and, once active, to wait longer before exiting.

scholarly journals A Real Options Analysis of Automatic Milking Systems

2003 ◽  
Vol 32 (2) ◽  
pp. 282-294 ◽  
Author(s):  
Phoebe D. Engel ◽  
Jeffrey Hyde
Keyword(s):  
Real Options ◽  
Automatic System ◽  
New Technology ◽  
Optimal Investment ◽  
Real Options Approach ◽  
Useful Life ◽  
Automatic Milking ◽  
Robotic Milking ◽  
Automatic Milking Systems ◽  
High Degree

Automatic, or robotic, milking systems have the potential to significantly change the way milk is produced on U.S. dairy farms. However, there is a high degree of uncertainty associated with adoption of this new technology. A real options approach is used to analyze the decision to replace an operational milking system with an automatic milking system. The most important source of uncertainty is shown to be the length of the technology's useful life. Under our assumptions, the automatic system is always an optimal investment if it is certain that it will last longer than the operational system being replaced.

Study on the Application of Real Options in Coal Resources Investment

2014 ◽  
Vol 978 ◽  
pp. 265-271
Author(s):  
Wu Da ◽  
Wan Li Xing
Keyword(s):  
Real Options ◽  
Real Option ◽  
Investment Decision ◽  
Investment Project ◽  
Theoretical Research ◽  
Coal Resources ◽  
The Real ◽  
Real Option Theory ◽  
Real Options Approach ◽  
Option Theory

This paper uses the real options approach to conduct research on the coal resources development investment decision by literature studies, the combination of theoretical research and practical research. It has carried on the systematic overall retrospect to the domestic and international research results about real option. It introduces and analyzes the real option theory on the basis of analyzing and appraising to the traditional investment methods systematically in detail. This paper has studied the value of the investment project again with the real option theory. It sums up the application area, step and analyzing frame of real option theory, and analyzes the insufficiency of the traditional investment decision on the basis of comparing with traditional coal resource investment decision, and proposes some improvement suggestions.

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