scholarly journals The Method of Real Options in the Evaluation of Strategic and Investment Decisions

2017 ◽  
Vol 5 (3) ◽  
pp. 41-45
Author(s):  
Гераськина ◽  
A. Geraskina
Keyword(s):  
Real Options ◽  
Real Option ◽  
Net Present Value ◽  
Option Price ◽  
Investment Decisions ◽  
Present Value ◽  
Discounted Cash Flow ◽  
Investment Projects ◽  
Important Addition ◽  
Discounted Cash Flow Method

The method of real options is one of the new approaches to estimate investment projects’ cost and it is an important addition to discounted cash flow method. Real option significantly increases the efficiency of the project due to the possibility of decision-making during its implementation. This aspect is especially important in unstable environmental conditions. The main differences between the financial and real options are presented. The differences of valuation of investment projects by the real options method and net present value are examined. The article presents the types of real options, as well as the methods of calculating the option price.

scholarly journals Real Options and Discounted Cash Flow Analysis to Assess Strategic Investment Projects

2017 ◽  
Vol 30 (1) ◽  
pp. 91-101 ◽  
Author(s):  
Agnė Pivorienė
Keyword(s):  
Real Options ◽  
Cash Flow ◽  
Flow Analysis ◽  
Investment Decisions ◽  
Business Environment ◽  
Strategic Decision ◽  
Discounted Cash Flow ◽  
Strategic Investment ◽  
Investment Projects ◽  
Real Options Approach

Abstract In today’s uncertain and highly competitive business environment, the difficulty to make strategic investment decisions is growing. The dominant discounted cash flow analysis requires the assumption of perfect certainty of project cash flows. However, under uncertainty traditional DCF approach falls short of providing adequate strategic decision support, and this situation demands new methods for investment evaluation. Real options approach (ROA) has shown the potential for valuation of strategic corporate investment decisions and managerial flexibility in situations of high uncertainty. Under ROA, projects are viewed as real options that can be valued using financial option pricing techniques. This framework allows their owner to keep investment options open and to benefit from the upside potential of an opportunity while controlling the downside risk. The main aim of this research is to investigate the feasibility of real options approach and traditional DCF analysis for assessment of strategic investment projects under environmental uncertainty.

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.

scholarly journals Valuing a natural gas pipeline expansion project: A copula-TGARCH application in Mexico

2018 ◽  
Vol 64 (2) ◽  
pp. 95
Author(s):  
Ricardo Massa Roldan ◽  
Montserrat Reyna Miranda
Keyword(s):  
Natural Gas ◽  
Real Options ◽  
Net Present Value ◽  
Joint Effect ◽  
Gas Pipeline ◽  
Energy Prices ◽  
Present Value ◽  
The Real ◽  
Investment Projects ◽  
The Individual

<p>With the liberalization of energy prices and the opening of the energy sector to competitors in Mexico, an opportunity for new investment projects is now open. Due to the current conditions of international energy markets, such as volatility and low prices with no prospect of reversion, a need for valuation tools to better capture the risk and benefits of a project presents itself. We propose a methodology based on the volatility treatment of numerous underlying assets in a Real Options Analysis: using a TGARCH for the individual volatilities and copulas for the joint effect. The methodology is applied to a natural gas distribution project of Mexico’s State oil company Petróleos Mexicanos (PEMEX). An estimated net present value of the gas pipeline is provided, considering the real options perspective. The result of our empirical application validates the real option’s theory of a higher net present value estimation for the project when incorporating the effect of different sources of uncertainty and non-linear interdependence.</p>

scholarly journals Valuation of Wind Energy Turbines Using Volatility of Wind and Price

2021 ◽  
Author(s):  
Doron Greenberg ◽  
Michael Byalsky ◽  
Asher Yahalom
Keyword(s):  
Wind Energy ◽  
Real Options ◽  
Net Present Value ◽  
Discounted Cash Flow ◽  
Energy Investment ◽  
Real Options Analysis ◽  
The Real ◽  
Investment Projects ◽  
Managerial Flexibility ◽  
Renewable Energy Investment

The limitedness of the nonrenewable local energy resources in Israel, even in background of the later gas fields&rsquo; findings, continues to force the state to devote various efforts for the &lsquo;green&rsquo; energy development. These efforts include installations both in the solar and in the wind energy, with a purpose to improve the diversity of energy sources. While the standard discounted cash flow (DCF) method using the net present value (NPV) criterion is extensively adopted to evaluate investments, the standard DCF method is inappropriate for the rapidly changing investment climate and for the managerial flexibility in investment decisions. In recent years, the real options analysis (ROA) technique is widely applied in many studies for valuation of renewable energy investment projects. Hence, we apply in this study the real options analysis approach for the valuation of wind energy turbines and apply it to the analysis of wind energy economic potential in Israel.

scholarly journals Real Options and Escalation of Commitment: A Behavioral Analysis of Capital Investment Decisions

2009 ◽  
Vol 84 (1) ◽  
pp. 133-155 ◽  
Author(s):  
Christine A. Denison
Keyword(s):  
Real Options ◽  
Capital Investment ◽  
Net Present Value ◽  
Investment Decisions ◽  
Capital Budgeting ◽  
Decision Makers ◽  
Escalation Of Commitment ◽  
Present Value ◽  
Value Analysis ◽  
Cognitive Accessibility

ABSTRACT: This study uses experimental methods to explore whether incorporating real options into net present value analysis can reduce escalation of commitment, or the tendency of decision makers to continue to commit resources to a project after receiving negative feedback. This reduction in escalation behavior should occur because the incorporation of real options offers the user greater cognitive accessibility to the possibility of project abandonment. Findings indicate that users of real options exhibit less escalation of commitment than do users of net present value analysis alone. The main result demonstrates that the use of real options in capital budgeting can affect the behavior and decisions of the user even in an experimental setting that controls for the informational advantage of using real options.

scholarly journals The Five Focusing Steps of the Theory of Constraints: Problems of Application in Strategic Analysis

2020 ◽  
pp. 97-109
Author(s):  
I. A. Nechitaylo
Keyword(s):  
Real Options ◽  
Net Present Value ◽  
Synergistic Effects ◽  
Theory Of Constraints ◽  
Strategic Analysis ◽  
Financial Mathematics ◽  
Present Value ◽  
Investment Projects ◽  
True Value ◽  
A Value

Objectives. We identify and investigate circumstances that limit an application of the Five Focusing Steps of the Theory of Constraints in the strategic analysis of investment projects effectiveness.Methods. The methods of factor analysis and financial mathematics including methods for evaluation real options are used.Results. It is shown that in some cases, an increase in business value can be created only by a combination of a number of investment projects, leading to consistent removal of constraints and arising of useful synergistic effects. It is also shown that a value of a project can be determined by changes in the strategy that the company will have the opportunity to make if project is implemented. In such cases, their evaluation without taking into account subsequent decisions may distort their true value.Conclusions and Relevance. We concluded that the main object of evaluation in strategic analysis should be a strategy as a series of future transformations, taking into account the real options generated by them. Therefore, the evaluation of single projects on the base of the Theory of Constraints can lead the rejection of valuable projects due to distortion of their true value. At the same time an application of the Five Focusing Steps in strategic analysis protect against investment in projects with negative net present value.

scholarly journals Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options

2021 ◽  
Vol 18 (10) ◽  
pp. 5262
Author(s):  
Raisa Pérez-Vas ◽  
Félix Puime Guillén ◽  
Joaquín Enríquez-Díaz
Keyword(s):  
Real Options ◽  
Net Present Value ◽  
Point Of View ◽  
Added Value ◽  
Human Consumption ◽  
Present Value ◽  
Investment Projects ◽  
Financial Valuation ◽  
Classical Models ◽  
A Company

Aquaculture is an increasingly relevant sector in the exploitation of natural resources; therefore, it is appropriate to propose various models that include the fundamental variables for its economic-financial valuation from a business point of view. The objective of this paper is to analyze different models for the valuation of investment projects in a company in the aquaculture sector in order to conclude whether there is a model that represents a better valuation. Therefore, in this study, four valuation models have been applied, three classical models (net present value, internal rate of return, and payback) and a more recent model, real options (RO) for a company producing and marketing seaweed in Galicia (region located in the northwest of Spain). The results obtained, RO (€5,527,144.04) and net present value (€5,479,659.19), conclude that the RO model estimates a higher added value by taking into account in its calculations the flexibility given by the expansion option. Future lines of research include the application of valuation models that have been applied to companies belonging to the same sector in order to compare whether the results found are similar.

scholarly journals Opcje realne jako alternatywa w wycenie projektów inwestycyjnych

2017 ◽  
Vol 5 (2) ◽  
pp. 53-63
Author(s):  
Michał Gnap
Keyword(s):  
Real Options ◽  
Real Option ◽  
Net Present Value ◽  
Rate Of Return ◽  
Option Value ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Standard Analysis ◽  
The Real ◽  
Real Option Value

The most important function of every company is to create value for its owners. In this concept, it is necessary to make actions both operating and investing. They are targeted to increase economical value in the future. Very popular in this age net present value and internal rate of return, even though very popular, they face absolute tool. Every limitation which is typical for those methods, lead to situations where management must take decisions intuitively. So standard analysis NPV should be expanded by additional tools like the real option. The aim of this work is not to characterize approaches used for estimation of real option value, but to show how seemingly unprofitable investments can be profitable due to feature real options which can bring to company over-proportional profit.

scholarly journals A FUZZY PAY-OFF METHOD FOR REAL OPTION VALUATION IN DETERMINATION OF MINING ENTERPRISE VALUE

2014 ◽  
pp. 264-270
Author(s):  
Marian Turek ◽  
Adam Sojda
Keyword(s):  
Real Options ◽  
Cash Flow ◽  
Real Option ◽  
Discounted Cash Flow ◽  
Enterprise Value ◽  
Flow Method ◽  
Mining Enterprise ◽  
Real Option Valuation ◽  
Discounted Cash Flow Method

The article presents the use of real options in determination of mining enterprise value. The value estimation is based on discounted cash flow method. The adoption of fuzzy numbers allows introducing a risk aspect to the known method of determination of enterprise value. A classic discounted cash flow method uses one scenario on the basis of which one value is determined. The method presented is grounded on three scenarios: optimistic, the most probable, pessimistic. On this basis the values defining a fuzzy number are indicated. Algorithm of this defuzzification, based on the idea of real options enables indicating a concrete value.

scholarly journals The role of the theory of real choices in the development of financial managers and their decisions in the evaluation of investment decisions

2015 ◽  
Vol 1 (3) ◽  
pp. 278
Author(s):  
Ammar Shihab Ahmed
Keyword(s):  
Real Options ◽  
Net Present Value ◽  
Investment Decisions ◽  
Cash Flows ◽  
Traditional Theory ◽  
Present Value ◽  
Real Options Theory ◽  
Capital Budget ◽  
New Variables ◽  
Future Cash Flows

According to traditional theory of the capital budget, the net present value of future cash flows of the project are discounted at an appropriate discount reflects the degree of volatility in expected future cash flows. If the net present value is positive accept the project and vice versa. And also do not show the actions that can be taken after the acceptance of the project and the commencement of work that could result in an increase or decrease of cash flows, and here highlights the shortcomings with the current environment variables that are complex, leading to a search for new methods in line with these new variables and of the theory real options to evaluate investment decisions and that gives a big role Skilled managers in making capital decisions, which is reflected in the cash flows of investment decisions and future reduction of risk, hence requiring real options theory enjoy CFOs high skills in order to maximize the company to which they belong value, so the company's skilled management is an important tributary of the success of companies that are looking for the competitive advantage that achieve the company's goals and the reduction of risk and the resulting Allatakd and of cash flows that you get as a result of the decisions of its managers.

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