The paper is devoted to the research on the net present value rule in which the option is considered in corperate investment decision. There are two problems to be solved in the traditional net present value rule. The first is predicting cash flow. The second is estimating the discount rate. Estimating discount rate is a key problem. The paper exerts its research on the following two aspects:Firstly, the paper gives the definition about discount rate from the efficient theory of capital market. The perfect market environment is the logical starting point of discussing discount rate. Discount rate should be appraised by capital market. Based on Markowitz's portfolio theory and capital asset pricing model (CAPM), the paper discussed the relations between risk and return. In the perfect capital market, investors only earn the return matched with the risk and can not get the excessive return, i.e. some given risk corresponds with some return. This is hurdle rate of single financial security. At the same time, this gives the cost of the capital source in corperate investment. So capital cost is a rational estimation of discount rate. Then, the paper argues the effect of capital structure to capital cost. So when the firm makes investment decision, the weighted average capital cost may be used. But there are two assumes which must be satisfied. The first is that the project risks are the same as the firm. The second is that the project to be valued should be financed in the same proportions of debt and equity as the firm as a whole. But the project's risks is not often consistent with the firm's. How to deal with it? Based on the Modigliani and Miller's theory on capital structure, the paper derived the relations between the weighted average capital cost when the firm is leveraged and the capital cost when the firm is unleveraged. So in order to attain the project's discount rate, the capital cost when it is unleveraged must be first got. Thus the substituted firms in the capital market whose risks are the same as the project's risks may be found. Through this relations, the project's capital cost when it is unleverage can be gotten. Under the firm's aimed capital structure, the project's discount rare can be caculated.But the traditional NPV rule implies when the investment decision had be made, the project will be not changed. This ignores management flexibility. The project can be abandoned or be contracted, i.e the flexibility is valuable. So if the option doesn't be considered, the traditional NPV rule can bring the wrong conclusion. Based on the option pricing theory , the paper discussed five types of real option. And concluded that the value of real option should be considered in corperate investment decision... |