The Application Research About Real Option Method In Decisions Of Environmental Protection Investment

Our country environment pollution is serious, has a critical threat to public health and the economic development of China. In recent years, the environmental protection investment of our country is increasing year by year, But the proportion of GDP is still very low, has not reach the proportion of effectively improving the environment. The 70 percent of environmental protection investment amount is invested by government. The environmental protection investment amount of our country is insufficient. The investor is single. One reason is that the enterprise, as?the environmental pollution entity, is not the responsibility subject of environmental protection. The fund the enterprise put in environmental protection investment is very little. The environmental protection investment has characteristics of big uncertainty, both social benefit and economic benefit, externality. The traditional NPV method will evaluate environmental protection investment projects, because the traditional NPV method has not considerate the value of uncertainty. So the enterprise would not like to invest the environmental protection projects. In order to accurately assess environmental protection investment projects, this paper introduces the real option method which is appropriate for environmental protection investment.This paper researches the real option method in the application of environmental protection investment with the guidance of the theory about environmental protection investment, net present value, and the real option method. Firstly, this paper introduces the concept and characteristics of environmental protection investment and the theory of net present value method, analyzes the shortage of the net present value approach. Secondly, this paper introduces the definition, characteristics and classifications of the real option method. This has laid the foundation of real options model established. Through the analysis of the advantages of the real options method, combining with the characteristics of environmental protection investment, this paper further analyzes the applicability of the real option method used in environmental protection investment decision-making. Thirdly, this paper analyzes parameters the real option involved and establishes the binomial real option model and B -S real option model. Then this paper illustrates the calculation method in the form of cases. Finally, due to common real option models–the expansion option and timing of option, this paper chooses the suitable models introducing using methods in the form of cases and proofs the applicability of the real option model to environmental protection investment.