scholarly journals Evaluating a portfolio of projects through the real options analysis

2020 ◽  
Vol 25 (3) ◽  
pp. 246-260
Author(s):  
A.B. Lanchakov ◽  
S.A. Filin ◽  
A.Zh. Yakushev
Keyword(s):  
Real Options ◽  
Real Option ◽  
Risk And Uncertainty ◽  
Expected Effect ◽  
The Real ◽  
Investment Projects ◽  
Financial Options ◽  
Portfolio Efficiency ◽  
The Face ◽  
Effective Development

Subject. The article analyzes the expected effect of a portfolio of projects in the face of risk and uncertainty, when using real options. Objectives. The purpose is to offer a more objective formula to assess the expected impact of a portfolio of projects for real investment objects under risk and uncertainty, using real options, and provide recommendations for improving the portfolio efficiency. Methods. The study draws on methods of real options and evaluation of investment projects through the real option value, the cash flow discounting method, synthesis, and mathematical modeling. Results. We systematized the main types of real options and developed a formula for calculating the expected effect of project portfolio implementation. The said formula shows that considering the additional long-term costs embedded in a portfolio of real options, which are associated with the use of these real options, and, therefore, reducing the overall risk of projects and the entire portfolio, permit to improve the objectivity of such calculations. Conclusions. When analyzing real options that have real assets as underlying instruments, it is often impossible to apply the computational formulae for financial options, as they differ significantly. The systematization of the main types of real options helps expand the range of application of management solutions. The offered formula enables to improve the efficiency of project insurance under risk and uncertainty and to use additional opportunities for effective development of the company.

Project portfolio valuation using real options

2020 ◽  
Vol 13 (2) ◽  
pp. 126-146
Author(s):  
A.B. Lanchakov ◽  
S.A. Filin ◽  
A.Zh. Yakushev
Keyword(s):  
Real Options ◽  
Real Option ◽  
Project Portfolio ◽  
Risk And Uncertainty ◽  
Expected Effect ◽  
Investment Projects ◽  
Financial Options ◽  
Portfolio Efficiency ◽  
The Face ◽  
Effective Development

Subject. The article analyzes the expected effect of a portfolio of projects in the face of risk and uncertainty, when using real options. Objectives. The purpose is to offer a more objective formula to assess the expected impact of a portfolio of projects for real investment objects under risk and uncertainty, using real options, and provide recommendations for improving the portfolio efficiency. Methods. The study draws on methods of real options and evaluation of investment projects through the real option value, the cash flow discounting method, synthesis, and mathematical modeling. Results. We systematized the main types of real options and developed a formula for calculating the expected effect of project portfolio implementation. The said formula shows that considering the additional long-term costs embedded in a portfolio of real options, which are associated with the use of these real options, and, therefore, reducing the overall risk of projects and the entire portfolio, permit to improve the objectivity of such calculations. Conclusions. When analyzing real options that have real assets as underlying instruments, it is often impossible to apply the computational formulae for financial options, as they differ significantly. The systematization of the main types of real options helps expand the range of application of management solutions. The offered formula enables to improve the efficiency of project insurance under risk and uncertainty and to use additional opportunities for effective development of the company.

Valuing Research Investment Projects Based on Discrete Time Model: A Real Options Approach

2014 ◽  
Vol 926-930 ◽  
pp. 4073-4076 ◽  
Author(s):  
Yong Gang Xue ◽  
Ming Li Zhang
Keyword(s):  
Real Options ◽  
Real Option ◽  
Investment Decision ◽  
Substantial Effect ◽  
Time Model ◽  
The Real ◽  
Investment Projects ◽  
Real Option Theory ◽  
Real Option Approach ◽  
Option Theory

The methodology is proposed to value a project based on real options model firstly. Then the BOPM is used to value a project and the empirical results are compared with the results which are based on NPV approach. The results favor the application of the real option theory and show that the option value have important role on investment decision. The results show that the real option approach is more rational than the traditional NPV approach in valuing project because the uncertainty is considered in real option approach. The uncertainty with respect to project return has a substantial effect on investment decision, which is only explained by the option theory.

Research on the Real Options in Investment Decision of Waterway Infrastructure Construction

2013 ◽  
Vol 734-737 ◽  
pp. 1617-1620
Author(s):  
Wei Jin
Keyword(s):  
Real Options ◽  
Carbon Dioxide Emissions ◽  
Capital Investment ◽  
Real Option ◽  
Investment Decision ◽  
Energy Utilization ◽  
Real Options Theory ◽  
The Real ◽  
The Government ◽  
Real Option Method

Developing the waterway infrastructure construction can improve the efficiency of energy utilization, reduce the energy consumption intensity and carbon dioxide emissions. Till the year 2020, China plan to complete 19,000 kilometers high grade channel. Construction of water infrastructure construction requires a large capital investment. However, the main financial source of funding the construction of transportation infrastructure at present in China is special financial allocation of the government. The unitary financing structure as well as the funding pressure has leaded to some serious financing problems. This paper applied the real options theory to the waterway infrastructure construction financing, analyzed the limitations of the NPV method and the advantages of real option method in investment decision of waterway infrastructure construction, and took an example to show its feasibility.

Real Option Approach for the Management of a New Product Development in the Pharmaceutical Sector

2013 ◽  
Vol 746 ◽  
pp. 551-556
Author(s):  
Federica Cucchiella ◽  
Massimo Gastaldi
Keyword(s):  
Product Development ◽  
New Product Development ◽  
Real Option ◽  
New Product ◽  
Pharmaceutical Sector ◽  
The Real ◽  
Investment Projects ◽  
Real Option Theory ◽  
Real Option Approach ◽  
Option Theory

The main scope of this paper is to perform a real options analysis that is often recommended as an emerging valuation technique for high-risk investment projects. The pharmaceutical sector is a sector where the real option can be positively applied to incorporate the flexibility and the risks of the new product development. In this paper the real option theory is applied to a pharmaceutical company that is developing a particular new product. Due to the uncertain nature of the new product development, it can be strategic to evaluate the real option benefits for the investment under analysis.

scholarly journals Evaluation of wind park tax incentives in Colombia by means of real options

2020 ◽  
Vol 19 (1) ◽  
pp. 459
Author(s):  
Miguel Jiménez-Gomez ◽  
Natalia Acevedo-Prins
Keyword(s):  
Real Options ◽  
Real Option ◽  
Renewable Energy Sources ◽  
Tax Incentives ◽  
The Real ◽  
Average Value ◽  
Price Increases ◽  
Fiscal Incentives ◽  
The Mean ◽  
Regression Toward The Mean

<p>The objective of this study is to assess tax incentives in Colombia to foster investment in wind parks. Fiscal incentives seek to diversify energy consumption with non-conventional renewable energy sources, since power is mostly generated by hydraulic force and since its price is impacted during dry seasons. The price of energy is modeled according to a regression toward the mean. This stochastic process was chosen because during droughts in Colombia there are price increases, which then return to their average value. This is an upward and downward spike behavior, as well as a regression toward the mean. Given price uncertainty and its impact on cashflow, wind parks were valued with real options to flatten the reversal for five years. The real option of flattening as an American call option was considered. Results show that, according to traditional valuation methods, wind parks in Colombia are not profitable even with tax incentives. However, according to the real options method, tax incentives do make these projects economically viable.</p>

scholarly journals COMPARATIVE ANALYSIS OF THE DISCOUNTED FLOW METHOD AND THE REAL OPTIONS METHOD AS APPROACHES TO THE EVALUATION OF INVESTMENT PROJECTS

2021 ◽  
Vol 1 (№7 2021) ◽  
pp. 78-82
Author(s):  
А.С. Тяпкина ◽  
N.D. Komova ◽  
А.В. Лихвойнен ◽  
В.I. Юхимец ◽  
V.S. Alexandrova
Keyword(s):  
Comparative Analysis ◽  
Real Options ◽  
The Real ◽  
Investment Projects ◽  
Flow Method

scholarly journals Just-in-Time system in terms of real options

Competitio ◽  
2020 ◽  
Vol 3 (1) ◽  
Author(s):  
Andrea Rozsa
Keyword(s):  
Resource Allocation ◽  
Real Options ◽  
Best Practice ◽  
Real Option ◽  
Corporate Strategy ◽  
Capital Budgeting ◽  
Just In Time ◽  
The Real ◽  
Practice Approach ◽  
Physical Assets

The value creation process in a company and the competitive position are critically influenced by corporate resource allocation and proper valuation of investment alternatives. After the Second World War, capital budgeting and strategic planning emerged as two complementary but different systems for resource allocation. The real options approach developed in the ’80s may provide a useful tool for making a connection between capital budgeting and strategic management. Real options are implicit managerial and operating flexibilities embedded in many non-financial assets and liabilities. In a wider sense: “A real option is the investment in physical assets, human competence, and organisational capabilities that provide the opportunity to respond to future contingent events” (Kogut-Kulatilaka, 2001). This paper shows that Just-in-Time (JIT) system as management philosophy can be regarded as a knowledge-based or capability-based implicit strategy rather than a simple, easy-toimitate best practice approach. Moreover, implementation of JIT can be considered as a strategic investment. The presentation focuses on how the relation among strategic investments, developed technological systems and corporate strategy can be expressed through the real options view.

scholarly journals Method of Real Options in Managing Investment Projects

2019 ◽  
Vol 8 (10) ◽  
pp. 2696-2699
Keyword(s):  
Project Management ◽  
Real Options ◽  
Service Level ◽  
Management Service ◽  
Strategic Decisions ◽  
The Real ◽  
Investment Projects ◽  
Efficient Management ◽  
Service Level Management ◽  
Key Factor

A key factor for the success of the project management is the availability of a clear pre-defined plan, minimizing risks and deviations from the plan, efficient management of changes (as opposed to process, functional management, service level management). Using the binomial method to estimate the value of real options, they proceed from the assumption that the number of links is discrete and known in advance. The logic of this approach requires that their number corresponding to the frequency of making the most significant decisions for the project. The nodes of the lattice should be those moments in time in which strategic decisions are made on reducing, developing, switching business, etc. In general, the use of the real options method extends the tools to justify decisions in managing investment projects.

scholarly journals The Sunk Cost and the Real Option Pricing Model

Complexity ◽  
2021 ◽  
Vol 2021 ◽  
pp. 1-12 ◽  
Author(s):  
Songsong Li ◽  
Yinglong Zhang ◽  
Xuefeng Wang
Keyword(s):  
Option Pricing ◽  
Real Options ◽  
Real Option ◽  
Value Function ◽  
Intrinsic Value ◽  
Pricing Model ◽  
Sunk Cost ◽  
Financial Options ◽  
Real Option Pricing ◽  
Option Pricing Model

Although the academic literature on real options has grown enormously over the past three decades, hitherto an accurate real option pricing model has not been developed for investment decision analyses. In this paper, we propose a real option pricing model based on sunk cost characteristics, which can estimate the value of real options more accurately. First, we explore the distinctive features that distinguish real options from financial options. The study shows that the distinguishing feature of the real options is the sunk cost, which does not exist in the financial options. Based on the sunk cost characteristic of real options, we find that the exercise conditions of real and financial options are different. Second, we introduce the sunk cost into the intrinsic value function of real options and establish a new real option pricing model. Finally, this paper also discusses the properties of the intrinsic value function and pricing model of real options. We find that the application of the Black–Scholes option pricing model will overestimate the value of real options.

scholarly journals A Real Options Approach to Valuate Solar Energy Investment with Public Authority Incentives: The Italian Case

Energies ◽  
2020 ◽  
Vol 13 (16) ◽  
pp. 4181
Author(s):  
Antonio Di Bari
Keyword(s):  
Solar Energy ◽  
Real Options ◽  
Real Option ◽  
Net Present Value ◽  
Option Value ◽  
Present Value ◽  
Energy Investment ◽  
The Real ◽  
Real Options Approach ◽  
Real Option Value

Solar energy investment represents currently a valid reason to support sustainable economic development. In fact, over the last few years, governments have applied different measures to incentivize private consumers and firms to use renewable energies. Photovoltaic (PV) projects are characterized by uncertainty due to meteorological conditions, the unpredictable behavior of government, and managerial flexibility. Since the Net Present Value (NPV) approach is not able to capture these uncertain factors, it was replaced with the Real Options Approach (ROA). The latter method manages to embed flexibility in PV investment using binomial trees. This paper valuates PV investment in all regional areas in Italy using an integrated approach between the discounted cash flows method and real option value, called Expanded Net Present Value (ENPV). We fit the probability of tax benefits into a binomial lattice model after analyzing the geographical position and weather conditions of all regional capitals of Italy. The results show that the cities with high irradiance/temperature have positive NPV and high investment values. On the other hand, while most cities have negative NPV, the inclusion of the flexibility in investment decisions gives additional value to the project, making the ENPV positive and implying an attractive investment opportunity with the possibility of delaying the project. We also propose a sensitivity analysis that shows how the real option value changes when incentive policies of the government become more attractive. This paper contributes to the existing literature in the way of considering financial, meteorological/geographical, and political factors to valuate PV investment.

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