Risk Discounting: The Fundamental Difference between the Real Option and Discounted Cash Flow Project Valuation Methods

2003 ◽  
Author(s):  
Michael R. Samis ◽  
David Laughton ◽  
Richard Poulin
Keyword(s):  
Cash Flow ◽  
Real Option ◽  
Fundamental Difference ◽  
Discounted Cash Flow ◽  
The Real ◽  
Valuation Methods ◽  
Project Valuation

In-Fusion, Inc.

2017 ◽  
pp. 1-4
Author(s):  
Susan Chaplinsky
Keyword(s):  
Venture Capital ◽  
Cash Flow ◽  
Real Option ◽  
Early Stage ◽  
Technical Note ◽  
Option Valuation ◽  
Discounted Cash Flow ◽  
The Real ◽  
Biotech Company ◽  
Real Option Method

This case is designed as an introductory exercise to familiarize students with several methods used to value early-stage companies. The value of a young biotech company is compared under the venture capital (VC), discounted cash flow (DCF), and real option methods of valuation. Students are asked to value the firm under the VC and DCF methods and then compare those values to the value obtained under the real option method. It is suggested that the student spreadsheet (UVA-F-1584X) be assigned in advance of the class with instructions to have students value the firm under the VC and DCF methods. A separate worksheet in the file (which can be hidden at the instructor's discretion) provides the option valuation for later discussion purposes. A technical note, “Valuing the Early-Stage Company” (UVA-F-1471), covering the basics of the VC and DCF methods of valuation can be assigned with the case.

scholarly journals A Brief Overview of the IPO Valuation Methods

2020 ◽  
Vol 15 (12) ◽  
pp. 41
Author(s):  
Olga Ferraro
Keyword(s):  
Cash Flow ◽  
Initial Public Offering ◽  
Professional Practice ◽  
Economic Value ◽  
Value Added ◽  
Economic Value Added ◽  
Discounted Cash Flow ◽  
Business Valuation ◽  
Valuation Methods ◽  
Public Offering

The method adopted for pricing in an Initial Public Offering is a key issue in the studies on business valuation. In particular, various researches sought to verify which valuation methodologies are preferable in the context of an initial public offering. The review of the main literature shows that Discounted Cash Flow, Market Multiples, Dividend Discount Model and, even if just to some degree, Economic Value Added are the most popular methodologies in the valuation practice. The comparison among different valuation methods, proposed in the literature and variously applied in national and international practices, reveals the necessity to pay more attention to valuation mechanisms that drive the pricing of the shares to be listed. The topic is linked to the ever more pertinent debate on the use of different methods in professional practice: financial experts and analysts tend, in fact, to compare results according to different estimates.

scholarly journals Comparison of the Datar-Mathews Method and the Fuzzy Pay-Off Method through Numerical Results

2016 ◽  
Vol 2016 ◽  
pp. 1-7 ◽  
Author(s):  
Mariia Kozlova ◽  
Mikael Collan ◽  
Pasi Luukka
Keyword(s):  
Monte Carlo Simulation ◽  
Monte Carlo ◽  
Simulation Model ◽  
Real Option ◽  
Fuzzy Numbers ◽  
Numerical Results ◽  
Option Valuation ◽  
The Real ◽  
Valuation Methods ◽  
Real Option Valuation

The paper compares numerically the results from two real option valuation methods, the Datar-Mathews method and the fuzzy pay-off method. Datar-Mathews method is based on using Monte Carlo simulation within a probabilistic valuation framework, while the fuzzy pay-off method relies on modeling the real option valuation by using fuzzy numbers in a possibilistic space. The results show that real option valuation results from the two methods seem to be consistent with each other. The fuzzy pay-off method is more robust and is also usable when not enough information is available for a construction of a simulation model.

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 Uma Aplicação de Opções Reais na Avaliação de Licença de Prestação de Serviços de Telefonia Móvel 3G no Brasil

2010 ◽  
Vol 8 (3) ◽  
pp. 329
Author(s):  
Rafael Stille ◽  
Celso Funcia Lemme ◽  
Luiz Eduardo Teixeira Brandão
Keyword(s):  
Decision Making ◽  
Real Option ◽  
Telecommunications Industry ◽  
Decision Making Process ◽  
Discounted Cash Flow ◽  
The Real ◽  
Real Options Approach ◽  
Mobile Phone System ◽  
Real Option Method ◽  
3G Mobile Phone

We analyze the contributions of the real option method to the decision making process in the telecommunications industry. We study the case of a public auction purchase of the license to operate a 3G mobile phone system in Brazil. The results indicate that the embedded flexibilities increase the value of the project by 64% in relative to the discounted cash flow method, which could justify the high premiums paid by the winning firms, which are incompatible with the value obtained from traditional methods of analysis. This suggests that the real options approach used, which can be easily replicated and is fairly intuitive, can be a useful tool to support the decision making process of these firms.

Valuation of a Troubled Firm: A Case Study on Jet Airways

2014 ◽  
Vol 1 (2) ◽  
Author(s):  
Anjala Kalsie
Keyword(s):  
Real Option ◽  
Market Price ◽  
Discounted Cash Flow ◽  
Book Value ◽  
The Real ◽  
Real Option Approach ◽  
Indian Firm ◽  
Real Option Method ◽  
Discounted Cash Flow Method

The objective in the paper is to value a firm in distress which is struggling to survive and continue its operations, unable to meet its debt obligations, and making losses so that it has a negative book value. The paper has taken a listed Indian firm which is in operation since a decade called Jet Airways. The paper looks at different methods to value this company, the most prominent being the real option approach to valuation. Finally, a comparison of different valuation methods was done with the real company price. The Discounted Cash Flow method tends to overvalue the price of a distressed firm. Real option method gives us a much smaller intrinsic price which is even close to the market price of the share.

Assessment of irrigation dam using real options and discounted cash flow approaches: a case study in Greece

Water Policy ◽  
2009 ◽  
Vol 11 (4) ◽  
pp. 481-488 ◽  
Author(s):  
Anastasios Michailidis ◽  
Konstadinos Mattas ◽  
Diamantis Karamouzis
Keyword(s):  
Real Options ◽  
Cash Flow ◽  
Flow Analysis ◽  
Discounted Cash Flow ◽  
Northern Greece ◽  
Uncertainty Factors ◽  
The Real ◽  
Discount Cash Flow ◽  
Real Options Approach

This article extends the evaluation techniques of an irrigation dam in northern Greece, called “Petrenia”, by comparing the real options approach along with, a traditional one, the discount cash flow. By introducing first a Monte Carlo simulation, the various uncertainty factors can be simulated and alternative value options can be computed, feeding them later in the real options model. Results from the case study in Greece clearly demonstrate that the irrigation dam can be classified as a profitable investment, by applying traditional discount cash flow analysis, while by applying the real options approach the project cannot be classified as profitable. Taking into consideration the uncertainty factors, the real options approach reveals that the investment could be postponed and decision makers can keep the option of investing open. Sequentially, discount cash flow analysis accompanied by the real options approach facilitates decision making and improves the investment assessment analysis. In this particular project assessment, two uncertainty factors, variation in dam capacity and water price, restrict the profitability of the irrigation dam, according to the results of the real options approach.

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