scholarly journals Evaluation of wind park tax incentives in Colombia by means of real options

2020 ◽  
Vol 19 (1) ◽  
pp. 459
Author(s):  
Miguel Jiménez-Gomez ◽  
Natalia Acevedo-Prins
Keyword(s):  
Real Options ◽  
Real Option ◽  
Renewable Energy Sources ◽  
Tax Incentives ◽  
The Real ◽  
Average Value ◽  
Price Increases ◽  
Fiscal Incentives ◽  
The Mean ◽  
Regression Toward The Mean

<p>The objective of this study is to assess tax incentives in Colombia to foster investment in wind parks. Fiscal incentives seek to diversify energy consumption with non-conventional renewable energy sources, since power is mostly generated by hydraulic force and since its price is impacted during dry seasons. The price of energy is modeled according to a regression toward the mean. This stochastic process was chosen because during droughts in Colombia there are price increases, which then return to their average value. This is an upward and downward spike behavior, as well as a regression toward the mean. Given price uncertainty and its impact on cashflow, wind parks were valued with real options to flatten the reversal for five years. The real option of flattening as an American call option was considered. Results show that, according to traditional valuation methods, wind parks in Colombia are not profitable even with tax incentives. However, according to the real options method, tax incentives do make these projects economically viable.</p>

Research on the Real Options in Investment Decision of Waterway Infrastructure Construction

2013 ◽  
Vol 734-737 ◽  
pp. 1617-1620
Author(s):  
Wei Jin
Keyword(s):  
Real Options ◽  
Carbon Dioxide Emissions ◽  
Capital Investment ◽  
Real Option ◽  
Investment Decision ◽  
Energy Utilization ◽  
Real Options Theory ◽  
The Real ◽  
The Government ◽  
Real Option Method

Developing the waterway infrastructure construction can improve the efficiency of energy utilization, reduce the energy consumption intensity and carbon dioxide emissions. Till the year 2020, China plan to complete 19,000 kilometers high grade channel. Construction of water infrastructure construction requires a large capital investment. However, the main financial source of funding the construction of transportation infrastructure at present in China is special financial allocation of the government. The unitary financing structure as well as the funding pressure has leaded to some serious financing problems. This paper applied the real options theory to the waterway infrastructure construction financing, analyzed the limitations of the NPV method and the advantages of real option method in investment decision of waterway infrastructure construction, and took an example to show its feasibility.

scholarly journals Just-in-Time system in terms of real options

Competitio ◽  
2020 ◽  
Vol 3 (1) ◽  
Author(s):  
Andrea Rozsa
Keyword(s):  
Resource Allocation ◽  
Real Options ◽  
Best Practice ◽  
Real Option ◽  
Corporate Strategy ◽  
Capital Budgeting ◽  
Just In Time ◽  
The Real ◽  
Practice Approach ◽  
Physical Assets

The value creation process in a company and the competitive position are critically influenced by corporate resource allocation and proper valuation of investment alternatives. After the Second World War, capital budgeting and strategic planning emerged as two complementary but different systems for resource allocation. The real options approach developed in the ’80s may provide a useful tool for making a connection between capital budgeting and strategic management. Real options are implicit managerial and operating flexibilities embedded in many non-financial assets and liabilities. In a wider sense: “A real option is the investment in physical assets, human competence, and organisational capabilities that provide the opportunity to respond to future contingent events” (Kogut-Kulatilaka, 2001). This paper shows that Just-in-Time (JIT) system as management philosophy can be regarded as a knowledge-based or capability-based implicit strategy rather than a simple, easy-toimitate best practice approach. Moreover, implementation of JIT can be considered as a strategic investment. The presentation focuses on how the relation among strategic investments, developed technological systems and corporate strategy can be expressed through the real options view.

scholarly journals A Real Options Approach to Valuate Solar Energy Investment with Public Authority Incentives: The Italian Case

Energies ◽  
2020 ◽  
Vol 13 (16) ◽  
pp. 4181
Author(s):  
Antonio Di Bari
Keyword(s):  
Solar Energy ◽  
Real Options ◽  
Real Option ◽  
Net Present Value ◽  
Option Value ◽  
Present Value ◽  
Energy Investment ◽  
The Real ◽  
Real Options Approach ◽  
Real Option Value

Solar energy investment represents currently a valid reason to support sustainable economic development. In fact, over the last few years, governments have applied different measures to incentivize private consumers and firms to use renewable energies. Photovoltaic (PV) projects are characterized by uncertainty due to meteorological conditions, the unpredictable behavior of government, and managerial flexibility. Since the Net Present Value (NPV) approach is not able to capture these uncertain factors, it was replaced with the Real Options Approach (ROA). The latter method manages to embed flexibility in PV investment using binomial trees. This paper valuates PV investment in all regional areas in Italy using an integrated approach between the discounted cash flows method and real option value, called Expanded Net Present Value (ENPV). We fit the probability of tax benefits into a binomial lattice model after analyzing the geographical position and weather conditions of all regional capitals of Italy. The results show that the cities with high irradiance/temperature have positive NPV and high investment values. On the other hand, while most cities have negative NPV, the inclusion of the flexibility in investment decisions gives additional value to the project, making the ENPV positive and implying an attractive investment opportunity with the possibility of delaying the project. We also propose a sensitivity analysis that shows how the real option value changes when incentive policies of the government become more attractive. This paper contributes to the existing literature in the way of considering financial, meteorological/geographical, and political factors to valuate PV investment.

The Value of Flexibility at Global Airlines: Real Options for EDW and CRM

2017 ◽  
pp. 1-18
Author(s):  
Mark Jeffery ◽  
Chris Rzymski ◽  
Sandeep Shah ◽  
Robert J. Sweeney
Keyword(s):  
Monte Carlo ◽  
Real Options ◽  
Real Option ◽  
Monte Carlo Analysis ◽  
Active Management ◽  
Growth Options ◽  
Option Value ◽  
Real Options Analysis ◽  
The Real ◽  
Real Option Value

Technology projects are inherently risky; research shows that large IT projects succeed as originally planned only 28 percent of the time. Building flexibility, or real options, into a project can help manage this risk. Furthermore, the management flexibility of options has value, as the downside risk is reduced and the upside is increased. The case is based upon real options analysis for an enterprise data warehouse (EDW) and analytic customer relationship management (CRM) program at a major U.S. firm. The firm has been disguised as Global Airlines for confidentiality reasons. The data mart consolidation or EDW marginally meets the hurdle rate for the firm as analyzed using a traditional net present value (NPV) analysis. However, different tactical deployment strategies help mitigate the risk of the project by building options into the project, and the traditional NPV is expanded by the real option value. Students analyze the different deployment strategies using a binomial model compound option Excel macro, and calculate the volatility using Monte Carlo analysis in Excel. A step-by-step tutorial is provided to teach students how to accomplish the real options analysis for a simplified project, and this tutorial is easily generalized by students to the case scenario. In addition to the tactical options, the case also has the strategic growth option of analytic CRM. Students must therefore analyze both the tactical and strategic growth options and make a management recommendation on funding the project and also recommend an optimal deployment strategy to manage the project risk.The case teaches real options for technology projects. Students learn how to calculate real option values, where the key input of volatility is obtained by Monte Carlo analysis in Excel. Students also learn that the real option value is “real,” resulting from active management mitigating the risk of the project and improving the upside. Most important, students understand the difference between tactical vs. strategic growth options and the important management issues to consider.

Valuing Research Investment Projects Based on Discrete Time Model: A Real Options Approach

2014 ◽  
Vol 926-930 ◽  
pp. 4073-4076 ◽  
Author(s):  
Yong Gang Xue ◽  
Ming Li Zhang
Keyword(s):  
Real Options ◽  
Real Option ◽  
Investment Decision ◽  
Substantial Effect ◽  
Time Model ◽  
The Real ◽  
Investment Projects ◽  
Real Option Theory ◽  
Real Option Approach ◽  
Option Theory

The methodology is proposed to value a project based on real options model firstly. Then the BOPM is used to value a project and the empirical results are compared with the results which are based on NPV approach. The results favor the application of the real option theory and show that the option value have important role on investment decision. The results show that the real option approach is more rational than the traditional NPV approach in valuing project because the uncertainty is considered in real option approach. The uncertainty with respect to project return has a substantial effect on investment decision, which is only explained by the option theory.

scholarly journals Evaluation of Investments in Wind Energy Projects, under Uncertainty. State of the Art Review

2021 ◽  
Vol 11 (21) ◽  
pp. 10213
Author(s):  
Benjamin Murgas ◽  
Alvin Henao ◽  
Luceny Guzman
Keyword(s):  
Wind Energy ◽  
Real Options ◽  
Renewable Energy Sources ◽  
Energy Investment ◽  
The Real ◽  
Monte Carlo Simulation Technique ◽  
Real Options Approach ◽  
Energy Projects ◽  
Marked Tendency ◽  
Public Opposition

The use of renewable energy sources, especially wind energy, has been widely developed, mostly during the last decade. The main objective of the present study is to conduct a literature review focused on the evaluation under uncertainty of wind energy investment using the real options approach to find out whether public opposition (NIMBY projects) has been contemplated, and if so, what have been the flexible strategies applied for its intervention. Overall, 97 publications were analyzed, identifying 20 different models or approaches, which were grouped into eight categories: 1. Real options, 2. Optimization, 3. Stochastics, 4. Financial evaluation, 5. Probabilistic, 6. Estimation, 7. Numerical prediction, and 8. Others. The real options approach, present in 32% of the studies, was the most popular. Twenty-eight types of uncertainties were identified, which were grouped, for better analysis, into nine categories. In total, 62.5% of the studies included the price of electricity as a source of uncertainty; 18.8%, the velocity of wind; and 15.6%, the feed-in rates-subsidy. Both random and non-random techniques were applied to assess the real options and to model the uncertainties. When evaluating real options, the Monte Carlo simulation technique was the most preferred, with 16 (51.6%) applications, followed by non-randomized techniques, decision tree, and dynamic programming, with eight (25.8%) applications each. There is a marked tendency to use stochastic processes to model uncertainty, particularly geometric Brownian motion, which was used in 61.3% (19) of the studies in the sample. When searching for “real options AND (nimby OR public opposition)”, no study was found, which shows the possibility of developing research on this aspect to determine its impact on investments in wind energy projects.

scholarly journals The Appraisal of Assets’ Fair Value Using the Real Options Technique

2021 ◽  
Vol 8 (2) ◽  
pp. 43-76
Author(s):  
A. Gulabyan
Keyword(s):  
Real Options ◽  
Real Option ◽  
Real Life ◽  
Fair Value ◽  
Theoretical Background ◽  
Asset Valuation ◽  
The Real ◽  
Traditional System ◽  
Real Options Valuation ◽  
Real Option Approach

The goal of this paper is to analyse and systematise the possible approaches to real options valuation, especially when considering the practical aspects of their application in real-life valuation problems. Therefore, the paper sets the following tasks: To outline the concept of fair value and analyse the traditional approaches to its calculation in the context of asset valuation To define the real-option approach to fair value estimation and analyse its theoretical background To determine the role of the real options approach in the traditional system of valuation techniques To analyse the practical aspects of their application in valuation problems considering the corresponding examples To provide the real-life example of this technique applied in current market conditions using the recent data. The object of this research is the option pricing models, and the subject is their application in estimation of real options embedded in corporate valuations, particularly considering the side.

scholarly journals Managing risk using real options in company’s valuation

2014 ◽  
pp. 125-132
Author(s):  
Edina Kulcsár
Keyword(s):  
Risk Management ◽  
Real Options ◽  
Real Option ◽  
Capital Budgeting ◽  
Total Risk ◽  
Strategic Decisions ◽  
The Real ◽  
Black Scholes Model ◽  
Black Scholes

The valuation of company is very important because provides information about the current value/situation of company, and through this, provide the opportunity of choosing the best company’s growth alternatives. The future strategic decisions are characterized by lack of knowledge, information, so all measures of company’s growth are closely linked with uncertainty and risk. The company’s valuation process is also related with uncertainty and risk. The risk may result both from the assessed assets and the technique used. In literature, we could find three approaches for risk management: capital budgeting based method, methods based on portfolio analysis and real options approach of risk management. Among them, the real options based methods is the most revolutionary approach for risk management. The advantages of the method, consists in the fact, that the process of establishing strategic decisions integrates the possibility of reversibility, delay and rejections, which isn’t it possible at two previous methods. The method also takes into account the total risk of company, so both the company-specific and systematic risk. In this study, I have used one of the best-known real option based method, the Black-Scholes model, for determining the option’s value. Determination of option value is based on the data of enterprise, which was tested Monte Carlo simulation. One of the basic assumptions of the Black-Scholes model is that the value of option is influenced by several factors. The sensitivity of option’s value could be carried out with so-called “Greeks”.. In the study the sensitivity analysis, was carried out with indicators Delta (Δ), Gamma (Γ) and Vega (ν). The real options based risk management determinations were performed in the R-statistics software system, and the used modules are 'fPortofio' and 'mc2d'. By using of real options method, I have calculated the average value of company capital equal with 38.79 million. By using simulation was carried out 1000 runs. The results of this show a relatively low standard deviation, small interquartile range and normal distribution. In the calculation of indicator Delta, could be concluded the value of company moves in 0.831 proportion to the price of options, the standard deviations of index is low, so the real option based method could be used with success in company’s value estimation. The Gamma index shows the enterprise value is sensitive just for large changes. The result of Vega reflects the value of option, so the company’s value volatility, which is small in this case, but this means a volatility of value. In summary, we can conclude that the call options pricing model, well suited for the determination of company’s value.

scholarly journals Overstock – A Real Option Approach

2010 ◽  
Vol 3 (2) ◽  
pp. 98 ◽  
Author(s):  
Rui Fernandes ◽  
Joaquim Gouveia ◽  
Carlos Pinho
Keyword(s):  
Supply Chains ◽  
Real Options ◽  
Real Option ◽  
Service Level ◽  
Controlled Environment ◽  
Working Capital ◽  
Management Performance ◽  
The Real ◽  
Real Options Approach ◽  
Real Option Approach

In the last decades, firms have been facing a new challenge, considering the increasing uncertainty of the markets and the pressure to achieve better levels of performance, within the stake-holders expectations. Three main problems have been emerging in dealing with management performance: the increasing pressure to reduce working capital, the growing variety of products and the fulfillment of a demanding service level. Most of the popular indicators have been developed based on a controlled environment. A new indicator is now proposed, based on the uncertainty of the demand, the flexibility of the supply chains, the evolution of the products lifecycle and the fulfillment of a required service level. The model to support the indicator will be developed within the real options approach. <br />

scholarly journals Forest management decision making based on a real options approach: An application to a case in northeastern Argentina

2017 ◽  
Vol 67 (1) ◽  
pp. 97-108 ◽  
Author(s):  
Diego Broz ◽  
Gastón Milanesi ◽  
Daniel Alejandro Rossit ◽  
Diego Gabriel Rossit ◽  
Fernando Tohmé
Keyword(s):  
Real Options ◽  
Discount Rate ◽  
Real Option ◽  
Net Present Value ◽  
Optimal Time ◽  
Management Decision ◽  
The Real ◽  
Real Options Approach ◽  
Management Decision Making

Abstract The Net Present Value (NPV) approach is widely applied to assess forest investments, but this method has serious shortcomings, which we propose to overcome by switching to the assessment through the Real Options Approach (ROA). The model in this paper starts with the simulation of the forest’s growth, combined with the projection of the products’ prices and valuing the assets using a binomial model. We include an option of postponement, determining the optimal period of felling. We find that ROA is more robust than the NPV approach because it relaxes the assumption of constancy of both the prices and the discount rate, allowing the determination of the optimal time of felling based on the growth rate of either the forest or the prices of its products. Contrary to the traditional NPV approach, the results obtained with ROA exhibit longer harvest turns and consequently higher profits. The key variable in the ROA, the Real Option Value (ROV) can be shown to be less (albeit moderately) sensitive to decreases of the discount rate than NPV. Moreover, ROV is moderately sensitive to decreases in the price of logs and is negligibly affected by rises in the costs of harvesting, loading and transporting rolls.

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