scholarly journals A real options approach to a classical capacity expansion problem

2005 ◽  
Vol 25 (2) ◽  
pp. 159-181 ◽  
Author(s):  
Antonio G. N. Novaes ◽  
João Carlos Souza
Keyword(s):  
Real Options ◽  
Infinite Horizon ◽  
Classical Problem ◽  
Capacity Expansion ◽  
Discounted Cash Flow ◽  
The Real ◽  
Classical Capacity ◽  
Real Options Approach ◽  
Decision Alternatives ◽  
Demand Patterns

Some authors, considering deterministic or stochastic demand patterns and different forecasting formulations, have studied the classical problem of optimally meeting a growing demand for capacity, over an infinite horizon. With this approach, only investment costs discounted with a predefined interest rate are considered in the analysis. Adding other expenditures and revenues, managers usually estimate the discounted cash flow of the project, and assume the organization will follow a predetermined plan when investing, regardless of how events unfold in the future. The real options approach, on the other hand, introduces the possibility of incorporating other decision alternatives in the economic analysis, such as the option of waiting or postponing, abandoning, switching, etc. In this paper we first review the classical capacity expansion models. Then, the concepts and properties of the real options approach, with emphasis on the Black-Scholes equation, are briefly discussed. Finally, an application example is presented and discussed.

Assessment of irrigation dam using real options and discounted cash flow approaches: a case study in Greece

Water Policy ◽  
2009 ◽  
Vol 11 (4) ◽  
pp. 481-488 ◽  
Author(s):  
Anastasios Michailidis ◽  
Konstadinos Mattas ◽  
Diamantis Karamouzis
Keyword(s):  
Real Options ◽  
Cash Flow ◽  
Flow Analysis ◽  
Discounted Cash Flow ◽  
Northern Greece ◽  
Uncertainty Factors ◽  
The Real ◽  
Discount Cash Flow ◽  
Real Options Approach

This article extends the evaluation techniques of an irrigation dam in northern Greece, called “Petrenia”, by comparing the real options approach along with, a traditional one, the discount cash flow. By introducing first a Monte Carlo simulation, the various uncertainty factors can be simulated and alternative value options can be computed, feeding them later in the real options model. Results from the case study in Greece clearly demonstrate that the irrigation dam can be classified as a profitable investment, by applying traditional discount cash flow analysis, while by applying the real options approach the project cannot be classified as profitable. Taking into consideration the uncertainty factors, the real options approach reveals that the investment could be postponed and decision makers can keep the option of investing open. Sequentially, discount cash flow analysis accompanied by the real options approach facilitates decision making and improves the investment assessment analysis. In this particular project assessment, two uncertainty factors, variation in dam capacity and water price, restrict the profitability of the irrigation dam, according to the results of the real options approach.

The Valuation of a Patent through the Real Options Approach: A Tutorial

2015 ◽  
Vol 10 (1) ◽  
pp. 99-116 ◽  
Author(s):  
Gianpaolo Iazzolino ◽  
Giuseppe Migliano
Keyword(s):  
Real Options ◽  
Net Present Value ◽  
Discounted Cash Flow ◽  
Chemical Absorption ◽  
The Real ◽  
Italian Case ◽  
Real Options Approach ◽  
Financial Options ◽  
Flat Screen

AbstractThe importance of knowledge and other intangible activities for the success of an enterprise have been broadly recognized over the last few years. In this paper a tutorial is illustrated on the valuation of a patent through the real options approach (ROA), since the use of the discounted cash flow (DCF) methods, such as the net present value (NPV), seems to show issues when evaluating opportunities, such as the ones offered by intangible activities. The logic underlying ROA is tightly based on financial options and, in this sense, uncertainty can be seen as an opportunity, and not necessarily as a threat and its effect on the value of an activity can become positive. The patent analysed (registered in 2009) is a patent by the Alfa Group (this is not the real name of the firm but is used here for privacy reasons), which is a worldwide leader in the production of Getters, metallic elements that, through a chemical absorption process, keep the devices in which they are embedded in vacuum status. Such equipment is used in lightning systems, monitor screens, flat screen TVs, etc. In this tutorial, an ROA has been developed in order to demonstrate how the value of intangible assets can be estimated by using an Italian case study that can be useful for further studies and uses.

Investment decisions in hog finishing: an application of the real options approach

2005 ◽  
Vol 32 (1) ◽  
pp. 47-60 ◽  
Author(s):  
Martin Odening ◽  
Oliver Mußhoff ◽  
Alfons Balmann
Keyword(s):  
Real Options ◽  
Investment Decisions ◽  
The Real ◽  
Real Options Approach

scholarly journals Diesel or Electric Jeepney? A Case Study of Transport Investment in the Philippines Using the Real Options Approach

2019 ◽  
Vol 10 (3) ◽  
pp. 51 ◽  
Author(s):  
Casper Boongaling Agaton ◽  
Charmaine Samala Guno ◽  
Resy Ordona Villanueva ◽  
Riza Ordona Villanueva
Keyword(s):  
Real Options ◽  
Traffic Congestion ◽  
Business Environment ◽  
The Philippines ◽  
Public Utility ◽  
Optimal Decision ◽  
Decision Strategy ◽  
The Real ◽  
Real Options Approach ◽  
The Government

The Philippines is moving towards a more sustainable public transport system by introducing a public utility vehicle (PUV) modernization program with electric jeepneys (e-jeepneys) and modernized diesel jeepneys. Despite its potential to address problems related to air pollution, traffic congestion, dependence on fuel imports, and carbon emissions, transport groups show resistance to the adoption of the government program due to costs and investment risk issues. This study aims to guide transport operators in making investment decisions between the modernized diesel jeepney and the e-jeepney fleet. Applying the real options approach (ROA), this research evaluates option values and optimal investment strategies under uncertainties in diesel prices, jeepney base fare price, electricity prices, and government subsidy. The optimization results reveal a better opportunity to invest in the e-jeepney fleet in all scenarios analyzed. Results also show a more optimal decision strategy to invest in the e-jeepney immediately in the current business environment, as delaying or postponing investment may incur opportunity losses. To make the adoption of the e-jeepney more attractive to transport operators, this study further suggests government actions to increase the amount of subsidy and base fares, establish public charging stations, and continue efforts to rely on cleaner, cheaper, and renewable sources of electricity.

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