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.

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 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 Real Options Analysis for Acquisition of New Technology: A Case Study of Korea K2 Tank’s Powerpack

2018 ◽  
Vol 10 (11) ◽  
pp. 3866 ◽  
Author(s):  
Sungchul Kim ◽  
Ronald Giachetti ◽  
Sangsung Park
Keyword(s):  
Economic Analysis ◽  
Real Options ◽  
Real Option ◽  
The Real ◽  
Weapon Systems ◽  
Real Options Valuation ◽  
Real Option Valuation ◽  
Acquisition Strategy ◽  
Options Valuation

For sustainable defense management, it is essential to acquire weapons systems that can adapt to future uncertain threats and, at the same time, to invest efficiently with limited budgets. Economic analysis is used to examine the costs, benefits and uncertainties of alternatives. In particular, the use of the real options valuation, which is one of the methodologies of economic analysis, is expanding. The real options valuation has shown effectiveness across various industries to evaluate investment strategies. In this paper, we apply the real options valuation to the weapon systems development case and confirm its usefulness. Unlike previous studies, the real option valuation methodology is applied retroactively to the finished project, compared to existing research mainly applying real options to value research and development (R&D) without knowing how the project completed. We use the following procedure. (1) Define the uncertainties of the three acquisition alternatives (development, technology adoption, and purchase). (2) Calculate the benefits of the three acquisition alternatives with expected and actual data without uncertainties. (3) Model the decision tree without options and with options. (4) Analyze and compare results with benefit and benefit cost ratio. We analyzed the Korea K2 tank powerpack development case by applying real options. We could see that the real options could have reduced the risk of losses when the development risk is high and market uncertainty exists. From the case study of the development of the powerpack, we learned the following three lessons. First, we reaffirmed the importance of objective value analysis in project decision making. Second, we need to analyze the project value continuously and revise the acquisition strategy accordingly. Third, the effectiveness of the real options valuation was confirmed for sustainable defense management. In addition, the real option analysis data acquired from similar finished projects can be useful for establishing a new product acquisition strategy and, at every decision-making phase, the real option evaluation should be continuously performed with updated information. In this paper, we first perform real option valuation of finished weapon systems in the Korean defense field. This paper is valuable in establishing a rational methodology for applying economic analysis to weapon system acquisition projects.

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.

Real Option Approach for the Management of a New Product Development in the Pharmaceutical Sector

2013 ◽  
Vol 746 ◽  
pp. 551-556
Author(s):  
Federica Cucchiella ◽  
Massimo Gastaldi
Keyword(s):  
Product Development ◽  
New Product Development ◽  
Real Option ◽  
New Product ◽  
Pharmaceutical Sector ◽  
The Real ◽  
Investment Projects ◽  
Real Option Theory ◽  
Real Option Approach ◽  
Option Theory

The main scope of this paper is to perform a real options analysis that is often recommended as an emerging valuation technique for high-risk investment projects. The pharmaceutical sector is a sector where the real option can be positively applied to incorporate the flexibility and the risks of the new product development. In this paper the real option theory is applied to a pharmaceutical company that is developing a particular new product. Due to the uncertain nature of the new product development, it can be strategic to evaluate the real option benefits for the investment under analysis.

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>

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.

Sign in / Sign up

Export Citation Format

Share Document