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• Subjective real option valuation uses same data inputs as traditional DCF analysis. • The value of delay stems from the investor's subjective views about risk premia. • Cost and revenue uncertainties have complex effects on the option value. • Hedging systematic risk can reduce the value of delaying investment. • The option value may increase or decrease with idiosyncratic, un-hedgeable risk. [Display omitted] We model investor heterogeneity using different required returns on an investment and evaluate the impact on the valuation of an investment. By assuming no disagreement on the cash flows, we emphasize how risk preferences in particular, but also the costs of capital, influence a subjective evaluation of the decision to invest now or retain the option to invest in future. We propose a risk-adjusted valuation model to facilitate investors' subjective decision making, in response to the market valuation of an investment opportunity. The investor's subjective assessment arises from their perceived misvaluation of the investment by the market, so projected cash flows are discounted using two different rates representing the investor's and the market's view. This liberates our model from perfect or imperfect hedging assumptions and instead, we are able to illustrate the hedging effect on the real option value when perceptions of risk premia diverge. During crises periods, delaying an investment becomes more valuable as the idiosyncratic risk of future cash flows increases, but the decision-maker may rush to invest too quickly when the risk level is exceptionally high. Our model verifies features established by classical real-option valuation models and provides many new insights about the importance of modelling divergences in decision-makers risk premia, especially during crisis periods. It also has many practical advantages because it requires no more parameter inputs than basic discounted cash flow approaches, such as the marketed asset disclaimer method, but the outputs are much richer. They allow for complex interactions between cost and revenue uncertainties as well as an easy exploration of the effects of hedgeable and un-hedgeable risks on the real option value. Furthermore, we provide fully-adjustable Python code in which all parameter values can be chosen by the user. [ABSTRACT FROM AUTHOR]

This research focuses on valuing an investment project through the Theory of Real Options Games (ROG), this approach allows extending the standard valuation analysis including flexibility and uncertainty scenarios in market structures such as monopoly and oligopoly, given the importance of making decision in investment projects, there is a need to identify strategies with tools to overcome the limitations of traditional methods based on the discounted cash flow model (DCF), analysing the impact that may exist on investment when incorporating the actions of other market participants. [ABSTRACT FROM AUTHOR]

As the dry bulk shipping market seems to have been stuck in a trough period for a long time, investors need to pay more attention to their investment strategies to survive during this period. This study aimed to find a suitable model to assess dry bulk ship investment decisions in the tough and peak periods based on real options theories. Two options, involving an abandonment option and a deferrable option, were used to define investors' responses to the uncertainty in investment processes such as stopping or selling vessels. The option valuation was solved by using a binomial valuation model, due to data limitations. In accordance with shipping cycle theories, different volatility parameters for the tough and peak periods were calculated using a generalized autoregressive conditional heteroskedasticity (GARCH) model. The application of the real options model to a case study involving secondhand ship trading indicated its viability. According to the results of the case study, the new model has advantages over the traditional net present value (NPV) method in uncertain investment environments. Thus, the results demonstrate that the real options model is a more suitable method for use in the current dry bulk shipping market. [ABSTRACT FROM AUTHOR]

The early termination of Public-Private Partnerships (ppp) usually occurs at any time during the life of the project, causing large costs for the parties. Specifically, the toll road concessions are exposed to high demand risk. Usually, highway concession contracts incorporate a compensation mechanism in case of early termination. However, the traditional techniques of the Discounted Cash Flow (dcf) used to value infrastructure projects do not capture the irreversibility of the investment, the uncertainty and the mechanisms of compensation for risk that allow taking actions to the parties involved in a concession contract. The early termination of a toll road concession can be valued as the concessionaire's right to abandon the execution of the project. The objective of this document is to assess the mechanism of early termination of a toll road concession as a contingent asset, implementing the theory of real options, where the value of the abandonment option depends on the risk of demand. The valuation methodology is applied to a real case study of the Program of the Fourth Generation of Highway Concessions (4G) by Colombian Government. The valuation of early termination mechanisms can help to understand ex-ante the risks faced by the public and private parties of a highway concession contracts. [ABSTRACT FROM AUTHOR]

Cash flows generated by mining projects tend to be volatile and are extensively influenced by exogenous variables, notably commodity prices and exchange rates. The traditional discounted cash flow (DCF) method, which is normally used for economic feasibility studies and mining project evaluations, presents inconsistencies because the method fails to adequately address uncertainties and operational flexibilities and often ignores certain specific market conditions. Numerous studies have been carried out for mining project evaluations using the real options valuation (ROV) technique for assessing commodity price uncertainty, but there is no research on the combined effects of price and exchange rate uncertainties. Therefore, in order to assess the economic viability of a mining project more accurately, the commodity price and its inherent volatility, the exchange rate and its inherent volatility, and the correlation parameters between them have been incorporated into the model and used in the evaluation process. One of the interesting findings revealed in the study is that project values are overestimated if only commodity price uncertainty is considered in evaluating the project value instead of the joint effect of commodity price and exchange rate uncertainties. This new ROV technique will explore the opportunity to utilize an alternative methodology for approximating project values and to identify valuation opportunities to enhance economic gains or to mitigate economic losses, where the DCF valuation method does not. [ABSTRACT FROM AUTHOR]

Precise valuation of the economic efficiency of risky investment projects in the mineral sector has a direct impact on the range of future investments. Since the mid-90s, a number of enterprises have also been giving increased attention to the valuation of managerial flexibility that cannot normally be estimated with classical discounted cash flow (DCF) analysis. This has been the result of a development in the real options analysis (ROA) and the simplification of its algorithms, most of which have been achieved through: Unfortunately, in most cases, models constructed on the abovementioned assumptions and modifications are not consistent with real projects. Some analysts recognize that project PVs might not follow the multiplicative process, which could have a direct impact on the project's value. In order to improve the MAD approach, the paper proposes a modified model where the multiplicative tree is replaced with an additive one. In addition, methods of 'additive volatility' calculation and 'dividend' adjustments were suggested. [ABSTRACT FROM AUTHOR]

This study aimed at conducting both qualitative and quantitative analyses of the Central Asia South Asia Electricity Transmission and Trade Project (CASA-1000) to obtain risk management information. Consequently, real options were introduced in the form of risk hedges, and we attempted to estimate the hedge cost. Through qualitative analysis we identified the geopolitical risks. We also see that a certain degree of demand risk exists. Therefore, when evaluating project feasibility, it would be better to consider the hedge cost of these risks. Through quantitative analysis, when weighted average cost of capital is ≤10.0% and volatility is below a certain value, a hedge risk based on real options and the introduction of private funds may be possible. Thus, from a risk management viewpoint, it could be suggested that introducing private funds is possible in certain situations. [ABSTRACT FROM AUTHOR]

The article discusses regulatory flexibility in America in relation to an alternative approach to cost-benefit analysis which is known as real options valuation (ROV), and it mentions a case study of the U.S. Food and Drug Administration's Foreign Supplier Verification Program. Regulatory lookback procedures in the U.S. are mentioned, along with discounted cash flow analysis and American President Barack Obama's administration. The practices of U.S. government agencies are also examined.

Abstract: In this paper, we present a fuzzy linguistic ontology payoff method for the valuation of real options in the aerospace industry. Using real data, we apply the fuzzy linguistic approach to determine the credibility measures and the credibilistic expected value for the fuzzy real options valuation payoff method. This approach is used to obtain a multi-scenario modeling process by envisioning three scenarios: optimistic, most likely, and pessimistic. In addition, our experience with the scenario estimates is premised on results in an operating profit forecast. This forecast corresponds to a plausible outcome within the aerospace licensing maintenance, repair, and overhaul market and provides a decision-making tool. This tool can be utilized for determining real options for project valuation of aerospace licensing revenues based on unit costs, recurring costs, and quantity of units sold. [Copyright &y& Elsevier]

Abstract: The main purpose of this paper is to propose a fuzzy approach for investment project valuation in uncertain environments from the aspect of real options. The traditional approaches to project valuation are based on discounted cash flows (DCF) analysis which provides measures like net present value (NPV) and internal rate of return (IRR). However, DCF-based approaches exhibit two major pitfalls. One is that DCF parameters such as cash flows cannot be estimated precisely in the uncertain decision making environments. The other one is that the values of managerial flexibilities in investment projects cannot be exactly revealed through DCF analysis. Both of them would entail improper results on strategic investment projects valuation. Therefore, this paper proposes a fuzzy binomial approach that can be used in project valuation under uncertainty. The proposed approach also reveals the value of flexibilities embedded in the project. Furthermore, this paper provides a method to compute the mean value of a project’s fuzzy expanded NPV that represents the entire value of project. Finally, we use the approach to practically evaluate a project. [Copyright &y& Elsevier]

This present paper introduces those methods that are currently available for project assessment. It emphasises the limitations of the traditional methods, such as the Discounted Cash Flow Method, when being used to evaluate highly uncertain projects, where decision makers have the flexibility enough to change the course of the project to meet those changes that had taken place at the market early stages. Those models that are able to provide a more level-headed assessment for this kind of project - where uncertainty and flexibility have become key factors in the decision making process - have been distinguished and compared. As a solution to this, the application of Real Option Analysis procedure has been suggested to valuate projects, since traditional tools are not enough by themselves. This theory arises from the evaluation of financial assets and is currently being used for the assessment of investment related projects, the same way as it can be used in the case of financial assets. Decision about using the real option analysis as the model to be applied was reached after carrying out an extensive bibliographical compilation regarding this real option analysis theory, in turn written by several researchers during the last few years. This methodology is subjected to comparative analysis with respect to those Discounted Cash Flow and Decision Tree Analysis based models. The evaluation of a given project - by applying the three project evaluation methods: Black-Scholes, Monte Carlo Simulation and Binomial Trees - is introduced. Finally, an analysis of the project evaluation outcomes under the different models being applied, is carried out. [ABSTRACT FROM AUTHOR]

Para incorporar flexibilidad en la evaluación de proyectos de inversión existen hoy en día dos principales metodologías de evaluación que son el descuento de flujo dinámico y las opciones reales. Al analizar estas metodologías se determinó que los métodos tradicionales no incorporan flexibilidad. A excepción del descuento de flujo dinámico, que aunque trabaja con los mismos supuestos de lo demás incorpora la flexibilidad al trabajar con escenarios, el problema aquí es que esos escenarios permanecen estáticos durante el periodo de evaluación, pudiendo llevar a decisiones equivocadas al subvalorar los proyectos de inversión. En el caso del análisis de opciones reales esta metodología sí incorpora la flexibilidad en la evaluación, por lo que sería la más adecuada de utilizar en el caso de tener que trabajar en entornos con alta incertidumbre. En la actualidad se le reconoce a este método su aporte al pensamiento estratégico ya que cuando se utiliza esta metodología lo primero es determinar las opciones del proyecto para luego valorarlas, por lo que una equivocada determinación de las opciones llevará a una mala valoración. [ABSTRACT FROM AUTHOR]

Discusses the relevance of real options analysis to engineering economic decisions. Discussion of the common modelling approach; History of real options; Limitations of discounted cash flow-based techniques when applied in situations of uncertainty.

Discusses the value of real options theory for the telecommunications industry in the U.S. Use of discounted cash flow (DCF) method in project evaluation and investments; Application of real options methodology in DCF analysis; Implications of real options theory for policymakers.