scholarly journals Dealing with uncertainties in the biotechnology industry: The use of real options reasoning

2001 ◽  
Vol 8 (2) ◽  
Author(s):  
Sven Remer ◽  
Siah Hwee Ang ◽  
Charles Baden-Fuller
Keyword(s):  
Real Options ◽  
Investment Decision ◽  
Discounted Cash Flow ◽  
Decision Tools ◽  
Managerial Flexibility ◽  
Market Risks ◽  
The Face ◽  
External Conditions ◽  
Potential Benefits ◽  
Biotechnology Companies

Managers of biotechnology companies face great technological and market risks in making investment decisions. Traditional investment decision tools such as the discounted cash flow (DCF) approaches are often deemed insufficient in the face of the highly uncertain environment surrounding biotechnology projects. More recently, there is an increasing interest in real options approaches, which, in contrast to DCF, explicitly takes into account the managerial flexibility to respond to changing internal and external conditions during the course of the project. It is this flexibility that makes real options reasoning not only perceived to be superior for evaluating projects, but also for developing value-enhancing strategies. However, there is considerable confusion about when the real options approach might be applicable in practice, be it in a formal or an informal way. Based on insights derived from interviews with European biotechnology investors and managers, this study provides an overview of the potential benefits and limitations real options thinking has on evaluating and managing risky projects, particularly with respect to biotechnology companies.

scholarly journals Valuation of Decision Flexibility and Strategic Value in Coal Gasification Projects with the Option-To-Switch between Different Outputs

Energies ◽  
2020 ◽  
Vol 13 (11) ◽  
pp. 2826
Author(s):  
Piotr W. Saługa ◽  
Paweł Grzesiak ◽  
Jacek Kamiński
Keyword(s):  
Real Options ◽  
Coal Gasification ◽  
Clean Energy ◽  
Cash Flows ◽  
Electricity Production ◽  
Discounted Cash Flow ◽  
Methanol Production ◽  
Managerial Flexibility ◽  
Real Options Valuation ◽  
Strategic Value

Coal gasification has been promoted as a sophisticated clean energy technology alternative to coal burning these days. Aside from the usual technical difficulties, economic issues of such projects—especially valuation challenges—are important problems that practitioners usually struggle with. This is because of the major extent of managerial flexibility linked with specific characteristics of coal gasification projects, in particular, possibilities to mothball/restart manufacturing lines, or change between different outputs. The value of such flexibilities may be well assessed by real options valuations. The aim of this paper is to show that for the coal gasification technologies the real options valuation is more suitable than traditional discounted cash flow technique. This approach was applied to calculate an integrated plant that can produce either electricity or methanol. As the valuation approach the multiplicative stochastic process was used. As a consequence, binomial lattices of end-product (electricity and methanol) were developed. Then, in regard to them (reference instruments), two corresponding lattices of net cash flows (consecutive instruments) were created. In the end, two trees of switching option value were developed—one for electricity production as an initial mode, and the second for methanol production, delivering expanded net present (strategic) value.

scholarly journals Hard coal project valuation based on real options approach: multiplicative vs. arithmetic stochastic process

2016 ◽  
Vol 32 (1) ◽  
pp. 25-40 ◽  
Author(s):  
Piotr W. Saługa ◽  
Jacek Kamiński
Keyword(s):  
Stochastic Process ◽  
Real Options ◽  
Lattice Models ◽  
Hard Coal ◽  
List Type ◽  
Direct Impact ◽  
Discounted Cash Flow ◽  
Investment Projects ◽  
Managerial Flexibility ◽  
Project Valuation

Abstract Precise valuation of the economic efficiency of risky investment projects in the mineral sector has a direct impact on the range of future investments. Since the mid-90s, a number of enterprises have also been giving increased attention to the valuation of managerial flexibility that cannot normally be estimated with classical discounted cash flow (DCF) analysis. This has been the result of a development in the real options analysis (ROA) and the simplification of its algorithms, most of which have been achieved through: ♦ incorporating lattice models, ♦ introducing a single uncertain project parameter (gross present value, PV) as an underlying instrument, ♦ assuming that the underlying asset follows the multiplicative stochastic process, ♦ introducing the ‘marketed asset disclaimer’ (MAD) assumption. Unfortunately, in most cases, models constructed on the abovementioned assumptions and modifications are not consistent with real projects. Some analysts recognize that project PVs might not follow the multiplicative process, which could have a direct impact on the project’s value. In order to improve the MAD approach, the paper proposes a modified model where the multiplicative tree is replaced with an additive one. In addition, methods of ‘additive volatility’ calculation and ‘dividend’ adjustments were suggested.

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.

scholarly journals Valuation of Wind Energy Turbines Using Volatility of Wind and Price

2021 ◽  
Author(s):  
Doron Greenberg ◽  
Michael Byalsky ◽  
Asher Yahalom
Keyword(s):  
Wind Energy ◽  
Real Options ◽  
Net Present Value ◽  
Discounted Cash Flow ◽  
Energy Investment ◽  
Real Options Analysis ◽  
The Real ◽  
Investment Projects ◽  
Managerial Flexibility ◽  
Renewable Energy Investment

The limitedness of the nonrenewable local energy resources in Israel, even in background of the later gas fields’ findings, continues to force the state to devote various efforts for the ‘green’ energy development. These efforts include installations both in the solar and in the wind energy, with a purpose to improve the diversity of energy sources. While the standard discounted cash flow (DCF) method using the net present value (NPV) criterion is extensively adopted to evaluate investments, the standard DCF method is inappropriate for the rapidly changing investment climate and for the managerial flexibility in investment decisions. In recent years, the real options analysis (ROA) technique is widely applied in many studies for valuation of renewable energy investment projects. Hence, we apply in this study the real options analysis approach for the valuation of wind energy turbines and apply it to the analysis of wind energy economic potential in Israel.

The Value of Managerial Flexibility in Strategic IT Investment

2011 ◽  
pp. 111-132 ◽  
Author(s):  
Xiaotong Li ◽  
John D. Johnson
Keyword(s):  
Real Options ◽  
Investment Decision ◽  
Investment Decisions ◽  
It Investment ◽  
Real Options Theory ◽  
Investment Evaluation ◽  
Managerial Flexibility ◽  
Investment Opportunities ◽  
The Relationship ◽  
Options Theory

In this chapter, we discuss the real options theory and its applications in IT investment evaluation. We provide a framework within which the appropriateness of using real options theory in strategic IT investment evaluation is systematically justified. In our framework, IT investment opportunities are classified into four categories based on two criteria: the technology switching costs and the nature of competition. We point out that different real options models should be adopted for each category. The electronic brokerage’s investment decision in wireless technology is discussed as a real-world case within the framework. Our study also provides some insights about the relationship between technology standardization and IT investment decisions.

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.

Project portfolio valuation using real options

2020 ◽  
Vol 13 (2) ◽  
pp. 126-146
Author(s):  
A.B. Lanchakov ◽  
S.A. Filin ◽  
A.Zh. Yakushev
Keyword(s):  
Real Options ◽  
Real Option ◽  
Project Portfolio ◽  
Risk And Uncertainty ◽  
Expected Effect ◽  
Investment Projects ◽  
Financial Options ◽  
Portfolio Efficiency ◽  
The Face ◽  
Effective Development

Subject. The article analyzes the expected effect of a portfolio of projects in the face of risk and uncertainty, when using real options. Objectives. The purpose is to offer a more objective formula to assess the expected impact of a portfolio of projects for real investment objects under risk and uncertainty, using real options, and provide recommendations for improving the portfolio efficiency. Methods. The study draws on methods of real options and evaluation of investment projects through the real option value, the cash flow discounting method, synthesis, and mathematical modeling. Results. We systematized the main types of real options and developed a formula for calculating the expected effect of project portfolio implementation. The said formula shows that considering the additional long-term costs embedded in a portfolio of real options, which are associated with the use of these real options, and, therefore, reducing the overall risk of projects and the entire portfolio, permit to improve the objectivity of such calculations. Conclusions. When analyzing real options that have real assets as underlying instruments, it is often impossible to apply the computational formulae for financial options, as they differ significantly. The systematization of the main types of real options helps expand the range of application of management solutions. The offered formula enables to improve the efficiency of project insurance under risk and uncertainty and to use additional opportunities for effective development of the company.

A real options perspective on entrepreneurial entry in the face of uncertainty

2003 ◽  
Vol 24 (8) ◽  
pp. 515-533 ◽  
Author(s):  
Jonathan P. O'Brien ◽  
Timothy B. Folta ◽  
Douglas R. Johnson
Keyword(s):  
Real Options ◽  
Entrepreneurial Entry ◽  
The Face

scholarly journals Evaluation of a Workplace Health and Wellbeing Training Course Delivered Online and Face-To-Face

2018 ◽  
Vol 15 (11) ◽  
pp. 2422 ◽  
Author(s):  
Zenobia Talati ◽  
Emily Davey ◽  
Carly Grapes ◽  
Trevor Shilton ◽  
Simone Pettigrew
Keyword(s):  
Repeated Measures ◽  
Relative Effectiveness ◽  
Perceived Competence ◽  
Perceived Usefulness ◽  
Workplace Health ◽  
Face To Face ◽  
Training Course ◽  
Health And Wellbeing ◽  
The Face ◽  
Potential Benefits

Organisations may benefit from training champions to promote healthy workplace environments and initiatives. This study compared the perceived usefulness and relative effectiveness of an employee training course offered via online and face-to-face formats. Individuals who took part in the training course were assessed on their perceived competence and confidence to implement changes pre- and post-training. Repeated measures Analysis of Variance (ANOVA) and a t-test were conducted to test for significant differences between pre- and post-training scores and/or mode of training, respectively. Although the face-to-face training course was rated as slightly more useful, there were no significant differences between the two modes of training for the other dependent variables, and both modes led to significantly greater perceived competence and confidence post-training. These findings demonstrate the potential benefits of training employees to implement changes in their workplaces.

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