Study Of The Application Of Real Option Theory In Real Estate Development And Land Bank Decisions

Traditional valuation tools, including DCF(Discounted Cash Flow),are the major approaches in the investment decisions .But in the uncertain world, more and more problems can not be solved by them. For example, traditional valuation tools can not evaluate the flexibility of the projects. So the real option approach is now applied in a wide range of investment.The purpose of this thesis is try to apply real option approach to make the investment decisions in the land reserve of the estate development projects. First the real option theory is illustrated systematically. Then the thesis demonstrates the application feasibility and necessity of this approach in these projects. Finally a case is used to explain how the theory is applied and the conclusion of the thesis is drawn.Based on the academic achievements in the real option theory, decision-makers can evaluate project more correctly and gain more profit, particularly when the projects have many flexibilities . In the same time ,taking an options-based approach is not simply a matter of using a new set of valuation equations and models. It requires a new way of framing strategic decisions.