scholarly journals The application of real option valuation techniques in the cellular telecommunication industry in South Africa

2009 ◽  
Vol 40 (3) ◽  
pp. 1-20 ◽  
Author(s):  
M. Mkhize ◽  
N. Moja
Keyword(s):  
South Africa ◽  
Capital Investment ◽  
Real Option ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Base Case ◽  
Telecommunication Industry ◽  
Option Valuation ◽  
Real Option Valuation ◽  
Telecommunication Operators

The purpose of this paper is to examine whether real option valuation techniques can be used by cellular telecommunication operators in South Africa when making capital investment decisions in next-generation service-orientated architectures. Prior studies, in other parts of the world, recommend the use of real option valuation techniques by telecommunication operators when conducting capital budgeting. In this study, both Black-Scholes and Binomial models are used to examine their effectiveness in valuing capital investments within a cellular telecommunication industry in South Africa. Results show that real option valuation techniques are effective in analysing investments in cellular telecommunication industry. Their strengths are mostly demonstrated when determining the value of strategic options that are added to traditional (base-case) net present value. Summary and conclusions are provided.

Influence of Managers’ Subjective Judgments on Project Abandonment Decision Making

2019 ◽  
Vol 18 (02) ◽  
pp. 419-443 ◽  
Author(s):  
Yuhong Liu ◽  
I-Ming Jiang ◽  
Meng-I Tsai
Keyword(s):  
Real Option ◽  
Net Present Value ◽  
Capital Budgeting ◽  
Decision Makers ◽  
Real Option Valuation ◽  
Fuzzy Process ◽  
Proposed Model ◽  
Managerial Optimism ◽  
High Level ◽  
Unrealistic Expectations

Real option valuation with flexibility under uncertainty has been proposed as an alternative and advantageous complement to the traditional net present value (NPV) method for capital budgeting decisions, yet the problem with unrealistic expectations on precision has still not been solved. It appears clearly that a high level of precision in cash flow estimates can be misleading for the decision makers with sentiments. To the extent that precision surrounds a decision, we introduce a fuzzy process into an abandonment option approach, which is built on the use of fuzzy numbers, to investigate the effects of managerial optimism and pessimism when a manager considers whether or not to abandon capital budgeting decisions under imprecision and uncertainty. From the numerical analyses of the proposed model, we find that an optimistic manager tends to continue executing the project, while a pessimistic manager tends to give up the project and liquidate it as the value of the abandonment option is within the range of a fuzzy sentiments interval. In addition, if the project value is below the lower bound of the fuzzy sentiments interval, then it is better to exercise the abandonment option rather than to continue holding it, for both optimistic and pessimistic managers. Finally, this paper also examines why managers may still continue a project, even if its Tobin’s [Formula: see text] value is smaller than one.

A FUZZY REAL OPTION VALUATION APPROACH TO CAPITAL BUDGETING UNDER UNCERTAINTY ENVIRONMENT

2010 ◽  
Vol 09 (05) ◽  
pp. 695-713 ◽  
Author(s):  
SHIN-YUN WANG ◽  
CHENG-FEW LEE
Keyword(s):  
Cash Flow ◽  
Real Option ◽  
Capital Budgeting ◽  
Decision Time ◽  
Optimal Decision ◽  
Option Valuation ◽  
Real Option Valuation ◽  
Flow Information ◽  
Present Worth ◽  
Uncertainty Environment

The information needed for capital budgeting is generally not known with certainty. The sources of uncertainty may be the net cash inflows, the life of the project, or the discount rate. We propose a capital budgeting model under uncertainty environment in which the concept of probability is employed in describing fuzzy events and cash flow information can be specified as a special type of fuzzy numbers. The present worth of each fuzzy project cash flow can be subsequently estimated. At the same time, to select fuzzy projects and determine the optimal decision time under limited capital budget, we offer an example to analyze the results of the capital budgeting problem under uncertainty using a fuzzy real option valuation.

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

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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