Studies On Option Decision Method And Its Application In Project Investment

The core of investment decision is to compare the value and the cost of an investment and decide the feasibility. The traditional investment decision methods, represented by Net Present Value method, compare the present values of expected income and cost stream to decide. Although they consider the reward of time and risk, they ignore the strategic value of creating following growth opportunities and the flexibility to adjust according to the market changes. Real Options Theory regards all kinds of investment opportunities and management flexibility as option and provides a practical qualitative tool. It is a great progress of investment decision theories. Option and Game Theory is the latest development, which combines option pricing theory and game theory to invest scientifically.This paper spreads according to the evolution of investment decision methods. It mainly includes: 1.Completely analyses traditional investment decision methods, briefly appraises hypothesis presupposition of each method and points out their limitations; 2.Systemically summarizes Option Pricing Theory, analyses influence factors of option value, discusses binominal tree model and Black-Scholes model and extends Black-Scholes model; 3.New high technology corporations have these characteristics: long R&D duration, high investment cost and big differences of risk level between each and every step. Real option theory was thus applied to analyzing quantitatively the optimal strategy and the ratio of stock right by way of building an embedded option cash flow chart; 4.Because Mergers and Acquisitions has high risk and high return, we can add a contract clause guaranteeing a price floor to the acquisition offer. The value of the contract calculated by applying binomial tree model and digital simulation software is scientific and reasonable; 5.Under the assumption that many firms compete for a single investment opportunity and only one firm can get it, the paper models the hazard rale of investment as a function of competitors ' trigger level to estimate the likelihood that competitors will invest. Under uncertainty and different information structure, option and game theory was applied to researching the optimal Nash equilibrium strategies of one or morefirm. By means of software Matlab, we simulate an example and illustrate how parameter affects investment strategies.