A Study On A Real Option Approach Of Financial Evaluations For Capital Investment Projects

It is a complicated process to evaluate a capital investment project. It relates on not only external environments of markets, resources, and product competitions, but the enterprise strategies and project itself as well. The central purpose is to provide the information of the project's values to invitees and administrators, so that they can improve the investment strategies and decisions.It has been known that the discount net cash flow is a commonly used method for evaluating capital investment projects. It is simple to be understood and easy to be implemented. Furthermore, it considers net cash flow and time values in the whole life-time of project. However, it is a deterministic method and does not consider any uncertain factors, for instance, managerial flexibilities to adapt decisions and unexpected market developments. Therefore, it is very possible to underestimate or overestimate the project's values.Considering the uncertainties inherent in the capital investment project, some scholars have proposed real option approaches to evaluate capital investment projects, which is expected to estimate the project's values more accuracy. However, it is not easy to identify and price a real option in real applications because of the complexity, implicitness and non-exclusive. Also, because it is hard to determine the future cash flow of the project.To improve the better estimate of project's evaluations and then to make the better the investment strategies and decisions, this paper proposes an approach to evaluate capital investment projects, which applies a real option couple of discount net cash flow and sensitive analysis. we find the driven factors affecting the real option by using the sensitive analysis. We estimate the variations of the value of real option based on calculations of sensitivity coefficients. Finally, we predict the possible values of the real option; then, we have a better estimate for the possible benefits and fields of capital investments induced by the uncertainties inherent in the capital investment project.