A Study On Capital Budget Based On Real Options

The maximization of Corporate value or shareholder value requires effective allocation of the enterprise capital, investment in value-added projects is an important way for enterprises to create value. Therefore, the management and decision-making concerning investment is closely related with the growth of enterprise value. Capital budgeting decision-making plays an important role in corporate profitability, capital structure, solvency and long-term development. With the development of market economy, the market is getting more and more competitive, how to optimize resource allocation and improve investment decision-making has become the biggest challenge.Based on the company's capital budget, We aim at do a study on capital budget based on Real Option, which challenges the traditional capital budgeting methods.The first chapter is an introduction about the background, purpose and meaning, the technical route, the main research content and innovation of the paper are also outlined in chapter one. The second chapter provides some literatures related to the study at home and abroad. Following foreign Scholars, Chinese scholars began to devote themselves to real options research, pointing out the shortcomings of traditional capital budgeting methods. ChapterⅢpoints out that the physical theory originated from Myers, He considers flexible management as a valuable right to be measured. He also points out the shortcomings of traditional capital budgeting methods, and highlights the advantages of real options approach, which is more in line with the actual situation of enterprises. Then several types of real options are proposed.It introduces various methods of the real option pricing, the Black-Scholes equation, binomial tree pricing model and the Monte Carlo simulation models. The Fourth Chapter provides an empirical analysis to the comparison between the traditional NPV method and the Black-Scholes. The net present value through the traditional way is negative, while positive with the real option approach. Then the binomial model approach is used to evaluate a project. Then Carlo simulation model is utilized to calculate the value of options. Chapter v gives some advices how to do it well.Through comparative analysis, the failure of traditional capital budgeting methods to consider the management flexibility of the operators is revealed. By comparison, the real option figures out a way to resolve these shortcomings, making the use of risk-free interest rate possible, with appropriate hahdling of uncertainty, and figure out the value of management flexibility which is much closer to the actual situation. This article concludes that:real options approach can be used to calculate the true value of a project, so that the investor has the right to choose, thus facilitating the maximization of corporate value.