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

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.

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Manager’s Flexibility & Cancellation Option: Insights of a Case Study in the Latin American Oil Industry

Journal of Financial Innovation ◽

10.15194/jofi_2015.v1.i3.28 ◽

2017 ◽

Vol 1 (3) ◽

Author(s):

Arthur Ridolfo Neto ◽

Marcelo Moreira Russo

Keyword(s):

Real Options ◽

Latin American ◽

Real Option ◽

Net Present Value ◽

Option Valuation ◽

Investment Opportunity ◽

Gas Field ◽

The Real ◽

Real Option Valuation

Purpose: This article focused on the main business insights of the use of Real Options valuation analysis in the eyes of a finance professional. It used a case study of an investment opportunity in the oil and gas field services industry in Latin America to discuss the methodology implementation and its insights. As a secondary objective, it discussed the insights and options embedded in this investment opportunity.Methodology: The investment opportunity was examined using the Real Options Analysis (ROA) framework and the results compared to the traditional methodology of Net Present Value. The valuation technique was performed as if it had been applied at the time the project was approved.Findings: The most important of Real Option valuation is not the results, but how one arrives at them. After the project value is calculated and the project approved or not, the Real Option valuation requires and supports the monitoring of the project. By understanding how the options are created, managers can make better decisions about the project after it was approved.Practical implications: A relevant contribution from the study was the discussion, as a practitioner, of the methodology implementation in a real world corporation. Originality & value: The case study evaluated two types of real options: first, the effect of an option to cancel a contract that was assessed from the perspective of the client contracting the project; and second, the option to abandon and defer, from the perspective of the company that will perform the investment to provide the services. By incorporating the cost of the put option that the company puts forth for the client (cancellation option) it reduces the project value by giving flexibility to its clients.

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Valuing flexibility in a retrofit investment

Journal of Corporate Real Estate ◽

10.1108/jcre-07-2013-0017 ◽

2014 ◽

Vol 16 (1) ◽

pp. 3-21 ◽

Cited By ~ 2

Author(s):

Jussi Vimpari ◽

Juho-Kusti Kajander ◽

Seppo Junnila

Keyword(s):

Real Estate ◽

Real Options ◽

Research Process ◽

Real Options Analysis ◽

Content Type ◽

The Real ◽

Real Options Valuation ◽

Corporate Real Estate ◽

Options Valuation

Purpose – The need for flexibility between organisational units is well established in corporate real estate. While the cost of flexibility is rather straightforward to approximate, measuring economical value of the flexibility is not straightforward. The purpose of this paper is to explore how real options analysis can be used for valuing flexibility in a real retrofit investment case, present a research process for valuing the flexibility in the retrofit investment case, and evaluate the empirical usability of real options valuation results compared with traditional discounted cash flow valuation results. Design/methodology/approach – The research is conducted as a case study. A newly introduced real options valuation method, the fuzzy pay-off method is used for analysing data from a Finnish office building retrofit investment case. The major difference in the selected method is that it uses fuzzy set theory instead of probabilistic theory, and the main advantage is the practical applicability, i.e. only three scenarios (minimum, best guess, and maximum) are needed for the valuation of flexibility. In the case, the scenarios are determined using a seven-phase research process that incorporates data available (e.g. rental agreements, building information) to a corporate real estate unit. The research process involves defining vacancy scenarios for rental agreements, transforming them into potential income achievable with flexibility, estimating cost of flexibility, comparing the potential income with the costs, and valuing the real options. Findings – The main finding of this paper is that real options analysis; especially the fuzzy pay-off method can be used for assessing the monetary value of flexibility. The applicability of the fuzzy pay-off method into a practical investment case was found straightforward because assignment of probabilities into different uncertainty scenarios was unnecessary. In the empirical case, it was found that flexibility investments were profitable only when parts of the building instead of the whole building were designed flexible. The present value of the pay-off from flexibility ranged from negative 58/sqm to positive 130/sqm, depending on the tenant. Originality/value – Real options literature, especially in the real estate and construction sector, has requested for new applications of real options analysis in practical setting. This paper adds to that request with an example of evaluating flexibility in a retrofit investment case. The empirical analysis produced in this paper was perceived valuable by case study investor and can be used as a guidance and motivation for further applications of real options in the industry.

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Measuring Synergies of Banks’ Cross-Border Mergers by Real Options: Case Study of Luminor Group AB

Journal of Risk and Financial Management ◽

10.3390/jrfm14090403 ◽

2021 ◽

Vol 14 (9) ◽

pp. 403

Author(s):

Andrejs Čirjevskis

Keyword(s):

Real Options ◽

Value Added ◽

Corporate Financing ◽

The Real ◽

Measurement Models ◽

Cross Border ◽

Valuation Method ◽

Real Options Valuation ◽

Market Value Added

Applying the real options valuation to measure merger and acquisition (M&A) synergy is highly debatable, with questions arising from the usefulness of this approach in real-world settings. Understanding the full benefits (and possible limits) of real options applications to measure synergy in cross-border merger activities remains a challenge. The main objective of the paper is to explore multiple types of synergies in the recent, highly strategic cross-border merger—the Luminor Group AB deal—and to value those synergies with the real options application. The research found that the sum of values of different types of synergies in M&A deals as the market value added provided by this deal could be valued with real options applications. A real options application may serve as a decision-making tool and at the same time be a useful valuation method of M&A deal synergies. The implications of this paper are twofold. First, the research contributes to corporate financing by providing relevant synergy measurement models in M&A deals. Second, the paper contributes to “grand challenges’’ research topics of international businesses by illustrating how a group of multinational banks solved the problem of income inequality across countries, and balanced inequality within their networks through a cross-border merger.

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

Review of Business and Economics Studies ◽

10.26794/2308-944x-2020-8-2-43-76 ◽

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.

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A Case Study of Modified Real Options Valuation Model for Early Stage Start-Ups in the Game Industry

Journal of Korea Game Society ◽

10.7583/jkgs.2014.14.4.67 ◽

2014 ◽

Vol 14 (4) ◽

pp. 67-74

Author(s):

Changsok Yoo ◽

Jaeki Jung ◽

Baek Poe

Keyword(s):

Real Options ◽

Early Stage ◽

Valuation Model ◽

Real Options Valuation ◽

Game Industry ◽

Options Valuation ◽

Start Ups

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Playing at Acquisitions

10.23943/princeton/9780691140001.001.0001 ◽

2015 ◽

Author(s):

Han Smit ◽

Thras Moraitis

Keyword(s):

Real Options ◽

Behavioral Finance ◽

Real Option ◽

Competitive Dynamics ◽

Uncertain Environments ◽

Real Option Valuation ◽

Acquisition Strategies ◽

Risky Investment ◽

Acquisition Strategy ◽

Strategy Design

It is widely accepted that a large proportion of acquisition strategies fail to deliver the expected value. Globalizing markets characterized by growing uncertainty, together with the advent of new competitors, are further complicating the task of valuing acquisitions. Too often, managers rely on flawed valuation models or their intuition and experience when making risky investment decisions, exposing their companies to potentially costly pitfalls. This book provides managers with a powerful methodology for designing and executing successful acquisition strategies. The book tackles the myriad executive biases that infect decision making at every stage of the acquisition process, and the inadequacy of current valuation approaches to help mitigate these biases and more realistically represent value in uncertain environments. Bringing together the latest advances in behavioral finance, real option valuation, and game theory, this book explains how to express acquisition strategies as sets of real options, explicitly introducing uncertainty and future optionality into acquisition strategy design. It shows how to incorporate the competitive dynamics that exist in different acquisition contexts, acknowledge and even embrace uncertainty, identify the value of the real options embedded in targets, and more. Rooted in economic theory and featuring numerous real-world case studies, the book will enhance the ability of CEOs and their teams to derive value from their acquisition strategies, and is also an ideal resource for researchers and MBAs.

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