The Optimistic View to Uncertainty. Benefits of Real Option Valuation Methodology in Project Valuation; Example of its Application for a Rail Terminal Modification Project

The two main factors that drive the shift to liquid cracking in the Middle East are the restricted availability of ethane and the fact that naphtha or mixed feed cracking provides us with a much more diverse product mix. This opens the path to a higher share of performance chemicals. Building petrochemical complexes based on liquid or mixed feed cracking requires very complicated downstream configurations at a high level of integration with refinery streams. The value created by such a project rests on the ability of the operator to solve complex optimization problems in a volatile market environment. Inevitably, the correctness of the investment decision rests on the ability of the management to determine the value of the project under conditions of uncertainty regarding the future market prices. This paper demonstrates how the approach that was developed originally for the option valuation, can be used to address the problem of project assessment under the conditions of uncertainty. A real-life example of an investment decision about a modification of a rail terminal is used to illustrate the problem and to present a solution to it. Building on this example further, the paper argues that the method of Real Option valuation can support a creation of a competitive advantage in the conditions of uncertainty.

Project Valuation: Price Forecasts Bound to Discount Rates

For their appraisals, most companies use discount rates that account for timing and riskiness of projects. Yet, especially for commodity projects, discounting future cash flows is generally at odds with the assumptions in a company’s hurdle rate. With a multitude of technical and market uncertainties, inconsistent assessments lead to biased valuations and poor investment decisions. In this paper, we consider price forecasts and discount rates in an integrated framework. We calibrate the risk premiums in a two-factor stochastic price process with a capital asset pricing model-based discount rate. Together with the analysts’ long-term prices forecasts, the suggested method improves consistency in valuation and decision making.

Dice manufacturing company: the acquisition decision

Learning outcomes The learning outcomes of this paper is as follows: understand the issues that faced private Egyptian textile producers following the January 2011 revolution and how that impacted their business model. Evaluate whether Dice’s inorganic expansion through acquiring Alex Clothing Company is a sound strategic decision given the economic uncertainty in Egypt. Analyze the acquisition decision through projection evaluation techniques, including net present value (NPV), internal rate of return (IRR) and modified IRR (MIRR), to measure whether the acquisition will add value to Dice. Discuss non-financial issues post-acquisition that are not captured by traditional capital budgeting and project evaluation techniques. Case overview/synopsis Dice Manufacturing Company, an established and successful textile manufacturing family business, is facing an important investment decision with regard to inorganic expansion through the acquisition of Alex Clothing Company and its subsidiary United Dyers. The case is intended to be discussed in an undergraduate corporate finance class. The case setting is inside Dice Manufacturing Company, where one of the founders, Nagy Toma and his CFO Victor ElMalek are analyzing the acquisition decision in January 2015. The protagonist is Victor ElMalek, who has to recommend a course of action for the company owners. The case allows students to apply capital budgeting and project valuation methods to make a decision on whether the acquisition brings value to Dice and to analyze issues management can face post-acquisition. The case follows through the history of Dice, presenting its business model and changes that accompanied the 2011 revolution. It then moves on to outline the acquisition opportunity and provides data for students to analyze through traditional project valuation techniques, including NPV, IRR and MIRR. Complexity academic level Undergraduate. Subject code CSS 1: Accounting and Finance. Supplementary materials Teaching notes are available for educators only.

Real option analysis. The viability of real estate projects

Traditional methods used for real estate project valuation, such as the static Net Present Value, have some limitations, as these methods do not consider the possibility of a change in the initial conditions of the project or during its development. On the other hand, the real options approach allows for flexibility in evaluating a real estate project, improving the decision-making process as it helps identify the optimal strategy and timing for the construction phases. The paper deals with evaluating an actual real estate project in La Rioja (Spain) using different options to estimate its final Net Present Value. The results show that the real estate project would be profitable under several scenarios, although the valuations can vary significantly among the different types of options. This is because some options add more value to the project than others, depending on their cost and the uncertainty they eliminate. In contrast, the results obtained using the traditional static method would have led a real estate developer to discard the project completely, as its Net Present Value would have been negative. This confirms that the introduction of flexibility in real estate developments creates additional value by allowing developers and investors to dynamically react to changes in the market, thus making better investment decisions and finding real estate investment opportunities that otherwise would not be considered at all.

Vale S.A.: Cobalt Streaming

ABSTRACT The case “Vale S.A. — Cobalt Streaming” describes a transaction that has taken place at Vale, a Brazilian mining company, and one of the most important in its segment. The transaction was developed to de-risk an important project for an expansion of a mine in the province of Newfoundland & Labrador in Canada. By streaming the cobalt production, Vale was able to get a competitive internal rate of return for the project compared to the lower level of risk the project would then offer. The case detailed the negotiation since the beginning until the company faced the challenge of choosing from the final proposals. The case allows the discussion of important aspects regarding project valuation: risk mitigation through the streaming negotiation, several different types of risk influencing the main issue of the case, decisions about the assumptions used, discussion about debt/equity characteristics on the overall project from Vale’s perspectives, and the evaluation of a project with non-conventional cash flow, given a substantial upfront revenue due to the streaming contract. So, the case is recommended for the disciplines of Financial Management, Project Valuation, or Risk Analysis in post-graduate courses of Business Administration and Finance.

Promoting Research and Landscape Experience in the Management of the Archaeological Networks. A Project-Valuation Experiment in Italy

Archaeological sites are part of the history and identity of a community playing a strategic role on the different scales of the cultural and economic common life. Whereas on the one end the most famous archaeological sites attract huge flows of tourists and investment, on the other hand, many minor archaeological sites remain almost ignored and neglected. This study proposes a project-evaluation approach devoted to the “minor” archaeological site development, outlining a territorial, socio-economic, and landscape communication pattern aimed at creating an archaeological network integrating other cultural and natural resources. As such, these networks get able to match the demand of customers who shy away from iper-consumerist tourism and want to deepen their knowledge of a place. The proposed approach integrates knowledge, evaluation, and design in a multiscale pattern whose scope is to foster and extend the archaeological research program, involving public and private stake/stockholders to widen the cultural-contemplative experience and promote further educational events concerning the themes of the local identity. With reference to the archaeological basin of Tornambè, Italy, a Web-GIS knowledge system has been drawn to provide the territorial information requested by the economic-evaluation multiscale pattern implemented to verify the cost-effectiveness of the project. The expected negative results of the economic valuation supported the allocation pattern of the considerable investment costs, as well as the hypothetic scenarios about the evolution of the cultural-contemplative experience due to the extension of the archaeological estate. Some disciplinary remarks propose a heterodox approach for a further interpretation of the economic results and financial indexes, by introducing the monetary dimension of such a social capital asset.

Valuation of Logistics Hubs

Logistics structures playing significant roles in the economic development of countries are irreversible investments. The exact valuation of them could be difficult due to various uncertainties and problems. This chapter illustrates a methodological way to be able to make an investment decision about the creation of a logistics hub in Of-Iyidere region. Under given assumptions, the study findings indicate that (1) the investment has a positive net present value under three different cost of capital rates, which are 7.5%, 10%, and 15%; (2) the internal rate of return is 18.5%; (3) the payback period is 7 years 8 months; and (4) the discounted payback periods are calculated as 10 years 1 month, 11 years 3 months, and 14 years 11 months according to the aforementioned cost of capital rates. Moreover, the chapter discusses basic project valuation challenges and presents solutions to improve the practice of logistics hub appraisal. So, the paper exhibits an essential guidance and policy support tool to highlight the potential of logistics hub infrastructures in Turkey.