Assessment Of The Value Of Y Company's Mining Rights

When company X tried to evaluate the mining right of company Y, they felt puzzled. How to value the uncertainty of gold price's fluctuation and the management flexibility? Could they really affect the total value of the gold mine?In fact, many investors may meet the same situation as company X when estimate an investment. 21 century is a time of global capitalization. The world is full of varieties of financial and material investments. However, the unexpected global economic recession caused by financial crisis makes it much more important for the investors to evaluate the profits properly and make scientific decisions in investments.The traditional value system is based on 'DCF', in which the 'NPV is the most popular one. It is built on the time value of future cash flow. It is quite effective when the market is stable and cash flow can be correctly predicted. But now, its disadvantages of neglecting the value of uncertainty, reversibility and flexibility in the investment are magnified by the market which is becoming more and more risky. On the contrary, the theory of 'Real Option' brought up in 1970s offers a new access to evaluation, in which the value of uncertainty is counted. It gives adjustability and flexibility to investors and values the opportunities and options. With this method, investors can not only assess the uncertainties, but also control the process of project to reduce the investment risk.Generally speaking, this thesis aims to solve the valuation confusion of company X. Firstly the basic theory and pricing model of DCF and Real Option were explained. Then they were compared qualitatively and quantitatively to show the advantage of applying the real option model in material investment. Finally, we go back the case discussion and illustrate how to use the binomial tree model based on real option to value the uncertainty and flexibility dynamically.