Using Monte Carlo Simulation to Improve Ceramic R&D Investment Decisions

2010 ◽  
Vol 105-106 ◽  
pp. 798-801
Author(s):  
Bao Cheng He ◽  
Hong Tao Jiang ◽  
Shu Zhi Yao ◽  
Bao Yuan He
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Real Options ◽  
Cash Flow ◽  
Investment Decisions ◽  
Discounted Cash Flow ◽  
Valuation Model ◽  
Managerial Flexibility ◽  
D Investment

The success of ceramic companies is highly dependent on research and development (R&D). Thus, a pivotal aim of management is to allocate resources to the best scientific and financial R&D projects. But the valuation of ceramic R&D is a difficult task for managers. The conventional discounted cash flow (DCF) methods fail to consider the value of managerial flexibility provided by R&D projects. Real options Analysis (ROA) offers a superior way of capturing the value of flexibility. It enables decision-maker to value projects more accurately by incorporating managerial flexibilities into the valuation model. However, ROA can’t effectively deal with the volatility of parameters in itself under high uncertain circumstance. In view of the limitation of ROA, this paper uses Monte Carlo simulation to solve the parameters volatility problems. In the end, the case study proves that Monte Carlo simulation can improve R&D investment decisions, especially for highly unpredictable ceramic R&D projects.

scholarly journals The real options method applied to decision making – an investment analysis

2019 ◽  
Vol 16 (4) ◽  
pp. 562-571 ◽  
Author(s):  
Guilherme Brittes Benitez ◽  
Mateus José do Rêgo Ferreira Lima
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Cash Flow ◽  
Investment Analysis ◽  
Discounted Cash Flow ◽  
The Real ◽  
Managerial Flexibility ◽  
Building Project ◽  
The Impact

Goal: This study aims to assess the impact of using the method of real options in investment analysis through a case study on a retail firm. Design / Methodology / Approach: It was targeted the applications of the real options method in a different type of environment and it was compared to another method more commonly used, the discounted cash flow method (DCF). The implementation and assessment of the real options method was investigated by means of a case study conducted in an investment analysis in a retail units firm. Results: The use of the real options method showed a more concise applicability over the DCF method. The results show that the project’s value, after the inclusion of managerial flexibility, increased significantly, which indicates that the analysis of the discounted cash flow undervalued the investment in question, since it disregarded the flexibility to expand or abandon the project. Limitations of the investigation: The presented method is proper to long-term processes where it is possible to make changes during the project. Investments in this sector usually are more related to short and medium-term decisions, making the application difficult due to the short decision-making period available to the managers. Practical Implications: The study provided the incorporation of flexibility through different pathways during the building project in a retail units firm. It was showed different scenarios where practitioners could decide among expanding, proceeding, reducing or abandoning the retail units based on the characteristics of their investments. Originality/value: The results obtained are an indication of this methodology to industrial businesses that are relatively volatile and that need a certain degree of flexibility in order to burgeon, such as the case of the retailing sector.

Methodologies and Techniques for Determining the Value of an Aircraft

2020 ◽  
pp. 036119812095841
Author(s):  
Bijan Vasigh ◽  
Farshid Azadian ◽  
Kamran Moghaddam
Keyword(s):  
Cash Flow ◽  
Flow Analysis ◽  
Operating Costs ◽  
Asset Valuation ◽  
Discounted Cash Flow ◽  
Valuation Model ◽  
Exogenous Factors ◽  
New Generation ◽  
Operating Revenue

Aircraft valuation and the estimation of an accurate aircraft price is undoubtedly a challenging task that has significant consequences for airlines. This paper presents an asset valuation model to show how a series of endogenous as well as exogenous factors can influence the value of an aircraft. Specifically, a discounted cash flow methodology is used to forecast the valuation of an old or new generation aircraft. Both total operating revenue and aircraft operating costs are taken into account to devise a reliable pre-tax profit measurement that is used as the basis of the discounted cash flow analysis. A sensitivity analysis based on Monte Carlo simulation is utilized to identify which factors have a more significant influence on the suggested aircraft value. Therefore, it addresses how value fluctuates in response to economic fluctuations. Indeed, the calculated value of an aircraft highly depends on the underlying assumptions used. The calculated value is compared with available data in a case study for verification.

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.

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.

Valuation of Technology-Based Companies

2014 ◽  
pp. 108-122
Author(s):  
João Zambujal-Oliveira ◽  
César Serradas
Keyword(s):  
Monte Carlo ◽  
Real Options ◽  
Cash Flow ◽  
Cash Flows ◽  
Growth Opportunities ◽  
Discounted Cash Flow ◽  
Real Options Theory ◽  
The One ◽  
Discounted Cash Flow Method ◽  
Options Theory

The cash flows of technology-based companies show high degrees of uncertainty. As traditional valuation methods can hardly capture these characteristics, they are insufficient for valuing these kinds of companies. On the contrary, real options theory can quantify the value associated with management flexibility, growth opportunities, and synergies. This chapter assesses the corporate value of a technology-based company. By gathering information from historical cash flows and using Monte Carlo simulations, the chapter generates future returns paths and primarily uses them for valuations by discounted cash flow methods. The generated volatility is subsequently used to value the measurement carried out by real options theory. The value obtained under the real options binomial approach is about 40% higher than the one obtained by the discounted cash flow method. This difference can be attributed to the value associated with uncertainty and flexibility.

scholarly journals A Comparison of Monte Carlo Simulation and Discounted Cash Flow Investment Appraisal Techniques Using an Office Building in Akure, Nigeria

2017 ◽  
Vol 1 (2) ◽  
pp. 299-308
Author(s):  
S. P. Akinbogun ◽  
O. P. Binuyo ◽  
O. T. Akinbogun
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Cash Flow ◽  
Investment Decision ◽  
Single Point ◽  
Investment Analysis ◽  
Point Estimate ◽  
Discounted Cash Flow ◽  
Expected Return ◽  
Level Of Risk

Every rational investor aimed to secure an optimum return from an investment at certain level of risk. However, the factors that affect the realization of the expected return are not known with certainty. Therefore, the reliability of a single point estimate for investment decision is debatable particularly when the likelihood of realizing the expected return is crucial to the investor. This study aimed at examining a better method of analysing the uncertainty in property investment rather than the use of the single point estimate formula. We collected a set of historic data from a multi-tenanted office complex in Akure to carry out the investment analysis using Monte Carlo simulation and Discounted Cash Flow Technique. The results from the study were compared and revealed that the single point estimate accounted for a huge level of risk as probability of realizing the expected return is unknown. The Monte Carlo simulation offers a more robust opportunity for a measured investment decisions by providing a probability of realizing different level of the expected returns. The study concludes that it is difficult to make a smart investment decision on a single point estimate. It therefore recommends the use of Monte Carlo simulation for property investment analysis for a more realistic return.

scholarly journals Economic and Risk Analysis to Deep Water Operations

2020 ◽  
pp. 11-16
Author(s):  
C. E. Ubani ◽  
A. O. Oluobaju
Keyword(s):  
Sensitivity Analysis ◽  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Cash Flow ◽  
Net Present Value ◽  
Oil And Gas ◽  
Risk Model ◽  
Flow Analysis ◽  
Discounted Cash Flow ◽  
Exploration And Production

The exploration and production (E&P) operations of oil and gas project in deep waters, is associated with risks. These risks affects return on investment if they are not identified and analyzed to reduce their impact on the project. This study seek to apply Discounted Cash Flow (DCF) analysis, Monte Carlo Simulation and Sensitivity analysis, to an existing field in the Niger Delta region in Nigeria, to ascertain the viability of deepwater project when it is affected by government fiscal terms and technical terms. Economic and risk models were developed to determine profitability indicators and risk associated with the project. Risk simulator software was used to carry out Monte Carlo simulation and the sensitivity analysis. Results obtained showed that the project was economically viable with a Net Present Value (NPV) of $1,621.8 million and Internal Rate of Return (IRR) of 34%. The Monte Carlo Simulation and the sensitivity analysis showed that the Contractor’s NPV and percentage take were most sensitive to tax (under the fiscal terms) with an range of $639.27 million for a variation of by +/- 10% and crude price (under the technical term). The model developed can easily be applied in investment selections and decision makers should make decision based on the outcome of both economic model (cash flow analysis) and the risk model (Monte Carlo Simulation).

scholarly journals Synergies between an Observed Port and a Logistic Company: Application of the Discounted Cash–Flow Model and the Monte Carlo Simulation

2017 ◽  
Vol 8 (1) ◽  
pp. 1-18 ◽  
Author(s):  
Dejan Dragan ◽  
Bojan Rosi ◽  
Toni Avžner
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Cash Flow ◽  
Flow Model ◽  
Strategic Partnership ◽  
Discounted Cash Flow ◽  
Strategic Cooperation ◽  
Simulation Based ◽  
Main Motive ◽  
Dcf Model

AbstractThe paper addresses an analysis of potential synergies in collaboration between an observed Port in the Mediterranean Sea and Central-European logistic railway-services based company. Both companies have established a strategic partnership. The main motive was cooperation in rail transport, with a particular emphasis on potential synergies that would a rail traffic have brought to a port’s business. For the purpose of synergies valuation under uncertain conditions, a Monte Carlo simulation-based framework with integrated discounted cash flow (DCF) model is applied. The possible values of future synergies are calculated via the DCF model by simultaneously changing values of different uncertain financial parameters at each repetition of a Monte Carlo scenario-playing mechanism. In this process, predicted forecasts of future synergetic throughputs are also used for various types of observed cargo. As it turned out, the generated synergies’ values follow the approximate normal distribution. Based on statistical inference and analysis of probability intervals it was discovered that there might indeed exist certain important synergies in the collaboration between both companies. This fact has convinced us into a belief in the correctness of companies′ decision to enter into such kind of strategic cooperation.

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