Study, Based On Option Theory Of Investment Appraisal Methods

The ubiquitous DCF (discounted-cash-flow) spreadsheet, especially NPV (net-present-value) that is at the heart of most corporate capital-budgeting systems, assumes that individuals must decide to invest or not at once, and will follow a predetermined plan, regardless of how events unfold, Furthermore, it gives us only one metric-NPV-for evaluating projects, and only two possible actions: invest or don抰 invest. However, some investment opportunities are comparable with real options, including the opportunities to wait due to such privileges as patent, the opportunities to expand, and the opportunities to switch into another industry. Thus, individuals can modify their investment decision and plan according to the specific market environment. The flexibility relative to these real options give rise to additional sources of value, which the NPV ignores. That is, the NPV often underestimate the value of real options. The purpose of the thesis is to systemize the option approach to investment strategy, and to come up with decision-making tactic, based on the framework of option pricing and the similarity between real option and option. There are five chapters. The first chapter introduces the quality of option and the factors that influence the value of option to set up a mirror for real option of investment. The second chapter emphasizes the similarity between real option and option and the feasibility to induct the theory of option into investment evaluation. The third chapter describes the procedure and the mechanism of option pricing. The forth chapter sets up a system of option approach to real option, deduces the pricing model of real option, and puts forward the decision-making tactic. The fifth chapter niches the option approach by case studying. Based on the independent result of option approach, the thesis provides a system of option approach to adapt to different investment strategy. Moreover, it quantitatively evaluates the two additional sources of value-the time valve of money on the deferred expenditure and the value relative to the ability to participate in good outcomes and insulated ourselves from some bad ones, and creates a option approach space with two option-value metrics-value-to-cost metric and volatility metric, which leads to six possible actions-invest now? 憁aybe now? 憄robably later? 搈aybe later? 損robably never?and 搃nvest never? According to case studying, the thesis concludes that the option approach can make up the limitations of the traditional DCF that underestimate the value of real option of investment,...