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Research Of Application Of Real Options On Venture Capital Investment Decision

Posted on:2003-09-14Degree:MasterType:Thesis
Country:ChinaCandidate:X J ZhangFull Text:PDF
GTID:2156360065955162Subject:Systems Engineering
Abstract/Summary:PDF Full Text Request
How to evaluate venture capital projects is an extremely important topic of venture capital management. In general, because of their high uncertainty and delayed return, it is difficult to evaluate venture capital projects. There are many traditional models about project selection, but only a few of them are applied in practice. So it's quite necessary to study venture capital project evaluating models and build a really practical investment decision frameworks of venture capital projects.Traditional evaluating models are increasingly criticized for failing to deal with management flexibility. Real options method is an extension of financial options theory to real assets (not financial assets). The investor who has the options has the right (but not the obligation) to invest, which adds the value to the project and decreases the risk. Real options theory can simulate management flexibility, interpreting and evaluating dynamic project management, time dependence, and projection interaction, and all these are properties of venture capital project, so it is suitable for evaluating venture capital projects. Real options theory and method provide a revolutionary tool for venture capital project investment decision.By applying systematic theory, the dissertation makes a comprehensive research on the application of real option theory to venture capital project investment decision and systematically analyzes the development and achievements of real options theory. It also comprehensively summarizes the advantages and disadvantages of traditional investment decision models. Some calculating models about net present value method (NPV), which is widely applied, are given. A comparison between NPV method and real options method is made, and the disadvantages of NPV method are analyzed. The significance, characteristics, theory basis, steps of application, and applying scope of real options method are also analyzed. A real options framework of project investment decision is presented. The limitations of real options application to real project are also studied. By adding the value of options to the NPV formula, we extend the traditional NPV rules. By applying real options to venture capital investment decision, the characteristics of venture capital investment, the advantages and shortcomings of traditional venture capital investment decision models, and the effect of venture capital investment on firm's value are studied. We believe that some options value is included in the value of the venture capital project. The options bases of venture capital investment, perfect market assumption, parameters estimation, venture capital phases dividing, and options included in the venture capital project are studied. A real options framework of venture capital investment decision in discrete-time is build. Based on the extended NPV formula, binomial model combinedwith black-scholes formula, an integrated model of venture capital investment decision evaluation is given. There are five parts in the model, and five steps to get the solution to . the model.The results of this dissertation provide a brand-new theory framework and practical tools for venture capital project investment decision. The dissertation has theoretical significance and practical value to venture capital project investment decision and management.
Keywords/Search Tags:venture capital, real options, project valuing, net present value
PDF Full Text Request
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