Investment Project Evaluation By Real Option Method: Example of Entrepreneurship Investment

The real option method, which emerged in the 1980s and is based on financial options, has been heavily involved in the literature since the early 2000s. Calculated by adding option value to investments in real assets, this method offers managers opportunities to evaluate the investment project. While the traditional capital budgeting method cannot be changed during the decision project process taken when evaluating the investment project, the real option method can be changed throughout the project process. The reason for this situation is that the real option method does not ignore the managerial flexibility. The reason for this situation is that the real option method does not ignore the managerial flexibility. In this study, these two methods in the literature are examined according to the types of projects.

Articulating the development strategy for the innovation and industrial cluster by the compound option method

Subject. The article focuses on the development strategy for the innovation and industrial cluster by the compound option method. Objectives. We articulate the development strategy for the innovation and industrial cluster by the compound option method, which would allow for flexible administrative decisions on the cluster evolution. Methods. The proposed method is based on the use of the compound option method, which includes constituents as follows: 1) the option for the reduction in the cluster strategy and withdrawal from it; 2) the option for the development and dissemination of experience across the cluster; 3) the option for the rearrangement and temporary suspension of the cluster strategy. Results. To illustrate the proposed method, we formulated the development strategy for the pilot innovation and industrial cluster of power engineering in the Nizhny Novgorod Oblast, which is represented with the backbone company PAO TNS Energo NN. The real option method helped increase the value of the cluster’s strategy. Combining the compound real option just as we suggest, it will be possible to avoid unreasonable administrative decisions on the withdrawal from the current strategy, which would provide for multiple, already existing tactical opportunities for the cluster’s development. The value of the current strategy, first of all, absorbs a put option. This is an option to reduce the cluster’s strategy or withdraw from it. Afterwards if the current strategy is continued, three call options are added to it. Conclusions and Relevance. The findings can be useful for governmental authorities in planning the development of innovation and industrial clusters and the harmonious advancement of the country.

Evaluating the Investment Projects of Spinal Medical Device Firms Using the Real Option and DANP-mV Based MCDM Methods

In an era of global aging, spinal and other joint degeneration issues have become a major problem for many elders. Bone-related operations have become the largest percentage of surgeries, accounting for 40% of the top 10 operations in the United States. Further, these spine-related operations are now ranked second among all bone-related operations. Due to this enormous and daily increasing market demand, more and more firms have started to pay closer attention to related medical devices and products. The global venture capitalists (VCs) have also started to follow the mega trend and will continue to invest heavily in this industry. Although most VCs recognize that investing in firms that produce innovative spinal products or devices is a must, very few practical managers or research scholars have defined the appropriate evaluation methods for these firms to use. The traditional net present value (NPV) method, which does not consider operation flexibility and changes in strategy, is far from the reality. The real option method can reveal the vagueness and flexibilities of the values being embedded in the investment projects at spinal medical device firms. However, the real option method is strictly quantitative. Usually, the evaluation aspects contain qualitative factors or local criteria which are hard to quantify in monetary terms. Thus, the adoption of multiple criteria decision making (MCDM) methods that can manipulate both quantitative and qualitative factors will be very helpful in evaluating and selecting investment cases like the spinal medical device firms, where both quantitative and qualitative factors should be considered. An analytical framework that consists of hybrid MCDM methods and the real option method will thus be very useful to evaluate the newly established firms producing spinal medical devices. Therefore, the authors propose a real option valuation as well as the Decision-Making Trial and Evaluation Laboratory (DEMATEL) based analytic network process (DANP) and the modified VIšekriterijumsko KOmpromisno Rangiranje (VIKOR) method (DANP-mV) based MCDM framework for evaluating the investment projects offered by these firms of spinal medical devices. An empirical study based on three newly established spinal medical device companies specializing in vertebral compression fracture (VCF) surgical devices was used to demonstrate the feasibility of the proposed analytical framework. Sensitivity analysis is performed to determine the influence of modeling parameters on ranking results of alternatives. This analytical framework can thus serve as a tool for VCs to use to determine the value of a potential candidate for investment. The proposed method can also serve as an effective and efficient tool for investment projects in other fields.

Current issues of company evaluation under fintech

The purpose of the current study was to form theoretical issues and practical recommendations on development of methodology evaluation for companies implementing modern financial technologies. The research was conducted based on methodology of systematic research, synthesis, abstract logic and scientific forecast, statistical methods and factor analysis methods, expert evaluation, real option method, explored fuzzy logic. Research resulted in discovery of such companies’ features that implement modern financial technology as evaluation objects, as well as exogenous and endogenous factors that impact the evaluation of the researched companies, and these factors’ classification offered; there were methodological recommendations developed on qualitative and quantitative ranking of specific indeterminacy; there were adaptations performed to discounted cash flows, real options, and ratio methods. The methodology developed was approbated based on domestic and foreign companies that provide consulting and evaluations services. As a result of its usage, a more precise evaluation was provided for the companies implementing modern financial technologies. A separate practical usage regarded the adopted method of discounting rate calculation based on the correction for specific fintech implementation risks and the developed mechanism of real options usage for additional company’s value that allows receiving a more accurate evaluation numbers. The classification manual of specific risks developed by the author is used by evaluation practitioners. The scientific issues and practical recommendations on improvement of the companies’ evaluation that were developed within the study are being used for teaching of “Evaluation and business value management” course in Financial University.

Penerapan Real Option Analysis dengan Perubahan Volatilitas dalam Menentukan Nilai Proyek Pertambangan

Author: Dean Andrean, Rio Nur Arifin, Novriana Sumarti AbstrakDalam menghadapi kondisi pasar yang tidak menentu, sebuah perusahaan memerlukan se- buah proses evaluasi nilai proyek yang dapat mengikutsertakan ketidakpastian yang timbul oleh kondisi pasar tersebut, agar perusahaan dapat memaksimalkan keuntungan dan mem- batasi kerugian yang mungkin timbul. Metode Real Option merupakan metode valuasi proyek yang dapat mengandung unsur ketidakpastian dan juga strategi investasi perusahaan pada proyek yang akan dijalankan. Ketidakpastian ini ditandai dengan adanya perubahan nilai proyek dari waktu ke waktu, dimana dalam makalah ini akan dimodelkan oleh Metode Lattice. Salah satu parameter yang diperlukan dalam metode ini adalah volatilitas yang menunjukkan cukup atau kurangnya informasi yang dimiliki mengenai perkembangan nilai proyek tersebut di masa yang akan datang. Makalah ini membahas tentang Real Option menggunakan model trinomial lattice yang dimodifikasi dengan perubahan volatilitas ber- dasarkan Haahtela. Model Real Option dengan perubahan volatilitas tersebut diterapkan pada masalah valuasi nilai proyek pertambangan perak. Hasil analisis menunjukkan nilai proyek yang positif sehingga proyek ini akan menguntungkan untuk dijalankan.Kata kunci: Evaluasi Nilai Proyek, Metode Lattice, Metode Trinomial, Real Option AbstractIn facing uncertain market conditions, a company needs a project value valuation process that may involve uncertainty arising from such market conditions, in order for the company to maximize profits and limit losses that may arise. Real Option method is a method of val- uation of projects that can contain elements of uncertainty and also the company's invest- ment strategy on the project to be run. This uncertainty is marked by the change of project’s value from time to time, which in this paper will be modeled by the lattice Method. One of the parameters required in this method is the volatility indicating sufficient or insufficient information about the development of the project’s value in the future. This paper discusses Real Option using modified trinomial lattice model with volatility changes based on Haahtela. The Real Option model with such volatility changes is applied to the valuation of the value of the silver mining project. The result show positive value of this project so the project is worthed to run.Keywords: Project Valuation Method, Method Lattice, Method Trinomial, Real Option