Cash Flow Simulation Embedded Real Options

2010 ◽  
Author(s):  
Tero J. Haahtela
Keyword(s):  
Real Options ◽  
Cash Flow ◽  
Flow Simulation

scholarly journals A two asset cash flow simulation model

1973 ◽  
Author(s):  
Richard C. Grinold ◽  
Robert M. Oliver
Keyword(s):  
Simulation Model ◽  
Cash Flow ◽  
Flow Simulation

Economics of Making Roadway Pavements Resilient to Climate Change: Use of Discounted Cash Flow and Real Options Analysis

2019 ◽  
Vol 25 (3) ◽  
pp. 04019017 ◽  
Author(s):  
Nivedya M. Kottayi ◽  
Rajib B. Mallick ◽  
Jennifer M. Jacobs ◽  
Jo Sias Daniel
Keyword(s):  
Climate Change ◽  
Real Options ◽  
Cash Flow ◽  
Discounted Cash Flow ◽  
Real Options Analysis

scholarly journals Real Options and Discounted Cash Flow Analysis to Assess Strategic Investment Projects

2017 ◽  
Vol 30 (1) ◽  
pp. 91-101 ◽  
Author(s):  
Agnė Pivorienė
Keyword(s):  
Real Options ◽  
Cash Flow ◽  
Flow Analysis ◽  
Investment Decisions ◽  
Business Environment ◽  
Strategic Decision ◽  
Discounted Cash Flow ◽  
Strategic Investment ◽  
Investment Projects ◽  
Real Options Approach

Abstract In today’s uncertain and highly competitive business environment, the difficulty to make strategic investment decisions is growing. The dominant discounted cash flow analysis requires the assumption of perfect certainty of project cash flows. However, under uncertainty traditional DCF approach falls short of providing adequate strategic decision support, and this situation demands new methods for investment evaluation. Real options approach (ROA) has shown the potential for valuation of strategic corporate investment decisions and managerial flexibility in situations of high uncertainty. Under ROA, projects are viewed as real options that can be valued using financial option pricing techniques. This framework allows their owner to keep investment options open and to benefit from the upside potential of an opportunity while controlling the downside risk. The main aim of this research is to investigate the feasibility of real options approach and traditional DCF analysis for assessment of strategic investment projects under environmental uncertainty.

Maintenance Decisions for Offshore Structures Using Real Options Theory

2004 ◽  
Author(s):  
Ernesto Heredia-Zavoni ◽  
Sandra Santa-Cruz
Keyword(s):  
Decision Making ◽  
Real Options ◽  
Cash Flow ◽  
Net Present Value ◽  
Offshore Structures ◽  
Present Value ◽  
Real Options Theory ◽  
Financial Variables ◽  
Maintenance Decisions ◽  
Options Theory

Real Options methods are currently used to assess investment projects considering: (1) the decision options that one can have along the development of the project, such as to expand it, or reduce it, or to abandon it, or to differ it, and (2) the uncertainty in some financial variables for the assessment of the economic investment. In these two regards, Real Options methods are superior to the traditional Net Present Value method. The purpose of the present paper is to establish the basis for Real Options modeling for decision making on design, inspection, maintenance, and decommissioning of offshore structures. The use of Real Options theory is sought in order to account for: (1) uncertainties in the financial variables involved in risk assessment based on expected costs, such as the economic consequences due to failure of a system; and (2) uncertainties associated with the resistance and loading of the structure for reliability assessment. An application of Real Options Theory is given in the paper for decision making on maintenance for an offshore structure. Cash flow from oil revenue is modeled as a stochastic process. Preventive and corrective maintenance is analyzed as a critical situation where the decision maker has the option to pay the costs of maintenance in order to obtain a benefit. Expressions are derived for the estimation of the value of the maintenance option; they are based on the derivation of the Black-Scholes equation for the evaluation of financial options. It is shown that the value of such project is equal to the sum of the net cash flow of the project (as with a Net Present Value evaluation) plus the value of the maintenance option. Projects with one and two decision times along the life of the structure are formulated and analyzed. Closed form solutions are obtained for such cases. An example is given in order to illustrate the differences between maintenance decisions using the Net Present Value and the Real Options method.

MULTIPLE PERSPECTIVES ON APPRAISAL TECHNIQUES FOR NEW TECHNOLOGIES: EXAMPLES FROM THE AEROSPACE INDUSTRY

2006 ◽  
Vol 03 (04) ◽  
pp. 421-439 ◽  
Author(s):  
MARCEL DISSEL ◽  
CLARE FARRUKH ◽  
DAVID PROBERT ◽  
FRANCIS HUNT
Keyword(s):  
Life Cycle ◽  
Technology Management ◽  
Real Options ◽  
Cash Flow ◽  
New Technologies ◽  
Aerospace Industry ◽  
Management Research ◽  
Multiple Perspectives ◽  
Discounted Cash Flow ◽  
Valuation Process

Appraising the benefits of new technologies is a commonly accepted challenge for any organization and is a prime area for technology management research. A wide variety of methods are available that intend to service this need, such as discounted cash-flow, real options, portfolio methods, roadmapping, etc. However, little evidence exists on who applies these techniques and how they are used in practice. This paper will evaluate the techniques from literature and compare the results with cases from the Aerospace industry. The paper will show that there are two distinct perspectives that can be taken when looking at the valuation process and these perspectives change in the course of the technology's life cycle.

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 SIMULATION MODELLING AS A TOOL FOR RISK ANALYSIS AND DEVELOPMENT OF STRATEGY TO INCREASE REAL ESTATE INCOME

2021 ◽  
Vol 2 (1) ◽  
pp. 97-103
Author(s):  
Lesia Chubuk
Keyword(s):  
Cash Flow ◽  
Simulation Modeling ◽  
Net Present Value ◽  
Flow Simulation ◽  
Cash Flows ◽  
Annual Growth Rate ◽  
Present Value ◽  
Real Property ◽  
Operating Income ◽  
Grain Elevator

The purpose of th article is to substantiate the possibility of applying methods for assessing the effectiveness and risks of investing for the analysis of income in the strategic management of real property. Methodology. The methodical bases of sensitivity analysis and simulation modeling of cash flows of real property income are stated. Results. The critical factors of costs and revenues affecting net present value of total cash flow from grain elevator real property object have been revealed. It is evidenced that the most significant factors influencing the amount of cash flows are the volume of sales of grain elevator services, to a lesser extent the total costs and the lack of sensitivity of net present value to staff salary variations. Simulation modeling of the change in net present value due to the change of the most significant uncertain factors was performed, which confirmed the assumptions about the efficiency of the investigated real property. The key factors are the main services that generate net operating income and critical expenses. Namely, services: storage, drying, shipment by road and rail, costs: fuel for drying, electricity, fuel for transportation of grain, staff salaries. For each factor, the relevant limits of change were established (determined by experts taking into account the average annual growth rate of the indicator) and cash flow simulation was performed. Practical implications. Statistical analysis of the model's behavior under the influence of random factors shows that the most probable value of the net present value of cash flows will be positive, despite the simulation of a significant change (+/- 40%) in electricity and fuel consumption factors for grain transportation. The values of the simple and discounted payback period also confirm the efficiency of the elevator property functioning. The indicator of the stability level demonstrate the need of planning input cash flows sources to cover the output cash flows. Value/originality. The expected profitability of grain elevator real property is largely determined by the factor of the volume of basic services sales (storage, drying, shipment and transport of products). This creates the preconditions for the subsequent assessment of the value of grain elevator real property based on the methodology of the income approach.

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