Study Of Real Option Approach On The Evaluation Of Forestry Project

Real option analysis applied in evaluation of forestry project was studied in this article. Above all it gave a summary of forestry project evaluation currently in China and pointed out their shortages. And then it introduced real option approach. After analyzing peculiarity of forestry project and its option characteristics, the author explained necessity and feasibility of real option analysis applied in forestry project evaluation. Based on finance option theory and combined forestry features, this study constructed an evaluation model of forestry project. In order to combine theoretic study with applied one, the author used case study, applying the model to a real forestry project which comes from the author's internship.Finally this study got the following conclusions. First, forestry project's option characteristics represented in four ways, because of its long cycle, the cash frame of forestry project is similar to financial option. The uncertainty of forestry investment is similarly to finance option's deadline. From the point of natural, forest resource has the character of call option and then the value of forestry project is not decided by currently cash flow but expand option. Second, the cash flow of forestry project is proximity as research & development items. Therefore, it can be divided into start-up, intergraded and expanded phase. Third, there are two parts in the value of a forestry project evaluated by real option analysis, one is net present value gained through traditional evaluation method, the other is option value which can accommodate dynamic of the decision.