Using Real Options to Estimate the Pre-commercialisation Value of a Drought Tolerant Wheat Trait

2020 ◽  
Vol 25 (2) ◽  
Author(s):  
Katherine Wynn ◽  
German Spangenberg ◽  
Kevin Smith ◽  
William Wilson
Keyword(s):  
Real Options ◽  
Net Present Value ◽  
Investment Decisions ◽  
Analytical Framework ◽  
Investment Strategy ◽  
Sunk Costs ◽  
Strategy Development ◽  
Managerial Flexibility ◽  
Drought Tolerant ◽  
The One

Uncertainty, sunk investment costs and managerial flexibility means standard investment budgeting methods such as net present value are ineffective and undervalue risky investments. Real options attains a more accurate and comprehensive assessment of investments. In this study, we apply a real options analytical framework to investment decisions during the research and development (R&D) process of a drought tolerant wheat trait. The results suggest the option value for investment is positive at each R&D stage and that investors should continue to invest. Biotechnology firms should use a real options analytical framework like the one applied in this paper for investment strategy development and for investment decisions involving uncertainty, sunk costs and decision flexibility.

Business opportunity assessment in Slovene organic spelt processing: application of real options model

2011 ◽  
Vol 26 (3) ◽  
pp. 179-184 ◽  
Author(s):  
Karmen Pažek ◽  
Črtomir Rozman
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Net Present Value ◽  
Sunk Costs ◽  
Organic Farms ◽  
Processing Application ◽  
The Real ◽  
Business Opportunity ◽  
Real Options Approach ◽  
Flour Production

AbstractDecision making in organic farming is related to risk and uncertainty, and options must be evaluated in the decision-making process. This paper presents the methodology of an integrated deterministic simulation system (KARSIM 1.0) application for decision-making support on organic farms in northeastern Slovenia. An emphasis to modify the net present value (NPVt) criterion by incorporating the real options approach was made. Its application is shown in organic spelt (Triticum aestivum ssp. spelta McKey) production and processing using two real options approaches, the Black–Scholes and binomial models. The NPVt indicates that the decision to process spelt for animal fodder is financially unfeasible, while the real options approach differentiates the results by organic spelt grain and flour production for human nutrition. It may be concluded that the real options approach can be useful when assessing projects with uncertainty, sunk costs and irreversibility, and it can provide for examining agricultural investment decisions.

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.

scholarly journals The Method of Real Options in the Evaluation of Strategic and Investment Decisions

2017 ◽  
Vol 5 (3) ◽  
pp. 41-45
Author(s):  
Гераськина ◽  
A. Geraskina
Keyword(s):  
Real Options ◽  
Real Option ◽  
Net Present Value ◽  
Option Price ◽  
Investment Decisions ◽  
Present Value ◽  
Discounted Cash Flow ◽  
Investment Projects ◽  
Important Addition ◽  
Discounted Cash Flow Method

The method of real options is one of the new approaches to estimate investment projects’ cost and it is an important addition to discounted cash flow method. Real option significantly increases the efficiency of the project due to the possibility of decision-making during its implementation. This aspect is especially important in unstable environmental conditions. The main differences between the financial and real options are presented. The differences of valuation of investment projects by the real options method and net present value are examined. The article presents the types of real options, as well as the methods of calculating the option price.

scholarly journals Real Options and Escalation of Commitment: A Behavioral Analysis of Capital Investment Decisions

2009 ◽  
Vol 84 (1) ◽  
pp. 133-155 ◽  
Author(s):  
Christine A. Denison
Keyword(s):  
Real Options ◽  
Capital Investment ◽  
Net Present Value ◽  
Investment Decisions ◽  
Capital Budgeting ◽  
Decision Makers ◽  
Escalation Of Commitment ◽  
Present Value ◽  
Value Analysis ◽  
Cognitive Accessibility

ABSTRACT: This study uses experimental methods to explore whether incorporating real options into net present value analysis can reduce escalation of commitment, or the tendency of decision makers to continue to commit resources to a project after receiving negative feedback. This reduction in escalation behavior should occur because the incorporation of real options offers the user greater cognitive accessibility to the possibility of project abandonment. Findings indicate that users of real options exhibit less escalation of commitment than do users of net present value analysis alone. The main result demonstrates that the use of real options in capital budgeting can affect the behavior and decisions of the user even in an experimental setting that controls for the informational advantage of using real options.

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.

scholarly journals Economic Analysis of Renewable Energy Regulation in France: A Case Study for Photovoltaic Plants Based on Real Options

Energies ◽  
2020 ◽  
Vol 13 (11) ◽  
pp. 2760 ◽  
Author(s):  
José Balibrea-Iniesta
Keyword(s):  
Real Options ◽  
Electricity Market ◽  
Large Scale ◽  
Net Present Value ◽  
Energy Regulation ◽  
Real Options Theory ◽  
Put Option ◽  
Public Subsidies ◽  
The One ◽  
Photovoltaic Plants

In this work, a novel methodology based on the real options theory has been developed for the evaluation of photovoltaic energy projects with a capacity greater than 100 KW in France. French legislation that regulates these types of projects presents two real options: on the one hand, the producer has a put option that consists of choosing between a Feed-in Tariff system and electricity market sale prices every year, and this put option coincides with public subsidies granted by the French Administration. On the other hand, the French Administration has a call option that provides a benefit to the public sector. This option supposes a limit on the subsidized production of electricity and reduces the value of the project to the promoter. The value of the put option is 4.28 € per MWh generated. The Extended Net Present Value has a value of −5.26 million Euros. The breakeven point of the project is achieved with an increase of 59% in the regulated rate. This means that the French Administration must increase the value of public subsidies if it wants to develop large-scale projects.

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 role of the theory of real choices in the development of financial managers and their decisions in the evaluation of investment decisions

2015 ◽  
Vol 1 (3) ◽  
pp. 278
Author(s):  
Ammar Shihab Ahmed
Keyword(s):  
Real Options ◽  
Net Present Value ◽  
Investment Decisions ◽  
Cash Flows ◽  
Traditional Theory ◽  
Present Value ◽  
Real Options Theory ◽  
Capital Budget ◽  
New Variables ◽  
Future Cash Flows

According to traditional theory of the capital budget, the net present value of future cash flows of the project are discounted at an appropriate discount reflects the degree of volatility in expected future cash flows. If the net present value is positive accept the project and vice versa. And also do not show the actions that can be taken after the acceptance of the project and the commencement of work that could result in an increase or decrease of cash flows, and here highlights the shortcomings with the current environment variables that are complex, leading to a search for new methods in line with these new variables and of the theory real options to evaluate investment decisions and that gives a big role Skilled managers in making capital decisions, which is reflected in the cash flows of investment decisions and future reduction of risk, hence requiring real options theory enjoy CFOs high skills in order to maximize the company to which they belong value, so the company's skilled management is an important tributary of the success of companies that are looking for the competitive advantage that achieve the company's goals and the reduction of risk and the resulting Allatakd and of cash flows that you get as a result of the decisions of its managers.

Managers’ Incorporation of the Value of Real Options into Their Long-Term Investment Decisions: An Experimental Investigation

2009 ◽  
Author(s):  
Christine A. Denison ◽  
Anne M. Farrell ◽  
Kevin E. Jackson
Keyword(s):  
Experimental Investigation ◽  
Real Options ◽  
Investment Decisions
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