Comparative evaluation of investment analysis methods: an application in renewable energy auctions between 2011 e 2015

Purpose - This work aims to analyze the assertiveness of net present value (NPV) and real options theory (ROT), at the moment of decision making for investments in renewable energy projects, considering the 244 winning projects in the auctions of reserve energy that occurred between 2011 and 2015.Design/methodology/approach –This is a quantitative study that used real data from 150 wind power and 94 photovoltaic projects available on ANEEL´s website. For data analysis, the confusion matrix, the area under the ROC Curve and the Kappa Index were used.Findings – It was concluded that NPV is more effective for recommendations to invest in projects with chances to be successful, while ROT is more accurate in suggesting against investing in projects with propensity for failure. It was also found that the degree of agreement between the two techniques is substantial and determined by the level of volatility of real options.Research limitations/implications – The limitations of this study refer to the difficulties of identifying the reasons that motivated failures in the projects.Originality/value – Theoretically, this work contributes to identify the characteristics that effectively differentiate ROT from NPV at the time of decision making. Empirically, this work contributes to doing an ex-post analysis of the projects.

Assessing value of a digital company: Uber’s IPO 2019

Theoretical basis Via this case, students are introduced to several alternative methods of valuation, including the valuation based on the “real options” theory. The novelty of the case is the link between valuation and the type of innovation that the company represents. The suggested valuation frameworks, which include both quantitative and qualitative assessments, are applicable not only in the context of an IPO valuation but also in the context of any kind of M&A activity. Research methodology This case was prepared mostly via secondary research. All the information about Uber and the industry was collected via publicly available sources. No internal documents of the company were used in the preparation of this case. The primary research consisted of an interview with the protagonist Catherine (whose name is disguised). Other disguised elements in the case include the name of the Value Investor conference organizer (Spyros Spyrou, not his real name), the country of the Value Investor conference (omitted) and the conference venue (Princess hotel, not any actual venue). Case overview/synopsis In 2019, Uber, the famous ride-sharing company, made waves in financial markets as the most controversial IPO valuation. With a wide range of proposed values, Uber puzzled investors, once again living up to its fame of a rebel and a disruptor. When Uber finally went public in May 2019, its IPO valuation stood at $82.4bn. The heated discussion in the media continued even after the IPO: “Is Uber worth this amount? Is there an upside potential for the investors who bought shares at the IPO price? What if this is a hype and markets are simply embracing higher valuations?” Complexity academic level This case can be used at the undergraduate, graduate (MBA) or executive level in finance-related courses such as Company Valuation or Valuing Innovation, which cover the topic of valuation and specifically the topic of valuing innovative companies.

Discovering Knowledge and Cognitive Based Drivers for SMEs Internationalization

Internationalisation begins with companies’ decision to enter global markets to develop knowledge and experience as key competitive factors in the global economy, which has been the subject of much empirical research. Decision-making, knowledge management, and effective internationalisation have become key strategic tools for all companies, especially for small- and medium-sized enterprises (SMEs). This study wants to provide a framework for SMEs internationalisation based on the real options theory, (ROT) as a knowledge driver method. For this purpose, the effective factors for internationalisation were identified by reviewing the literature on the subject and the internal and external backgrounds of the subject. Then, main and sub-factors were prioritised by the fuzzy analytic hierarchy process (AHP) method. The statistical population consisted of senior managers, business managers of SMEs in Isfahan, Iran, who were eligible to enter this study. Twenty-six experts participated in this study by judgmental non-random sampling method. A fuzzy AHP questionnaire was prepared in the form of 19 sub-factors and 7 main factors. The components of each factor in each group were also ranked by experts, and their weights were obtained. Next, according to the ROT strategies which have 5 options, an alignment matrix was used to align the factors affecting the decision with the strategies. After answering the research question, the option that had a higher mode was considered AS; then, this score was multiplied by the weight obtained in the previous step and the TAS was obtained. Finally, strategies were classified as appropriate, need further investigation, and inappropriate.

Exploring the Link of Real Options Theory with Dynamic Capabilities Framework in Open Innovation-Type Merger and Acquisition Deals

Although it is well established that acquisition-based dynamic capabilities have important consequences for merger and acquisition (M&A) processes, direct evidence on how real option applications can measure a dynamic capability-based synergy in open innovation-type M&A deals has been scarce. This study draws from seminal research on real options theory to explore some of these benefits and limits to value a synergy in one recent highly strategic acquisition. To strengthen the identification of causal effects, the paper develops the proposition that justifies the role of dynamic capabilities as antecedents of the success of open innovation-type M&A deals in the ICT industry and demonstrates real options’ application to measure M&A synergies. To test the internal and external validity of the proposition, the explorative case study on Samsung’s acquisition of Harman International Industries was analyzed and interpreted. This study contributes important empirical evidence to bear on the literature on open innovation theory, dynamic capabilities framework, and real options theory.

Valuing Dynamic Capabilities-Based Synergies with Real Options

Acquisition-based dynamic capabilities have become well established as a new imperative for organizing mergers and acquisitions (M&A) processes. However, understanding the full benefits and possible limits of real options applications to measure a dynamic capability-based synergy in M&A deals remains a challenge. This paper draws on real options theory to explore some of these benefits and limits to value a synergy in two highly strategic M&A deals. More specifically, the author develops the proposition that justifies the role of dynamic capabilities as antecedents of the success of M&A deals in the information and communications technology industry and demonstrates real options application to measure M&A synergies.

Dysfunctionality of two-part transfer pricing in investment centers' performance assessment

The paper discusses the question of the ability of the two-part transfer pricing system to stimulate investment centers to reject projects with positive NPV and to accept projects with negative NPV when there is no external market for intermediate products. The study revealed under which circumstances investment centers can take such dysfunctional decisions and it investigated if these systems can be modified to eliminate negative effects of such circumstances. In order to solve these problems, methods of financial analysis, real options theory and theory of constraints were used and several hypothetical business situations were modelled to exemplify possible dysfunctional behavior of investment centers when strategic decisions are taken in a decentralized manner. The paper considers the reasons for taking such decisions, such as using average rates of resource costs in calculating the transfer payment, presence of the real options in related projects complex and breaking the five focusing steps of the theory of constraints.

Application of the “real options theory” method to the production systems used in dairy cattle farming

ABSTRACT The objective of this study was to analyze applications of real options theory for increasing the productivity of Mantiqueira ecotype dairy cows kept in guinea grass pastures with different sources of bulky supplementation (black oats, fodder cane, or sorghum silage), because the traditional methodologies do not consider the uncertainties related to this activity. Real options theory, an investment evaluation method, fills this gap as its most significant feature is its flexibility to act on uncertain events. Based on the results obtained for two economic indicators, the net present value and internal rate of return, and considering the production items identified in the sensitivity analysis, this study evaluated the expansion flexibility of each system using the real options theory methodology in discrete time as proposed by Copeland and Antikarov (2001). The analysis of the expansion options showed that the values of the production systems increased by 6.73%, 1.21%, and 19.49% for the systems supplemented with sorghum silage, black oats, and fodder cane, respectively. The expanded net present values were R$ 141,642.39, R$ 64,211.08, and R$ 58,013.07 for the systems that adopted bulky supplementation with black oats, fodder cane, and sorghum silage, respectively.