Major Investment Project Decisions Based On Real Option Theory Study

The thesis designs an important investment projects decision approach based on real option theory by using the relevant foreign real option theory and research results and investment projects decision theory and research results in our country. A case is used for explaining the decision approach.The relationship of uncertainty, risk and business opportunities is introduced from the strategy aspect. The development of theory and practice on real option in abroad and our country is also discussed. And then, the history of real option theory, classification of real options, pricing method, comparison with finance option, and the research of important investment projects decision method are analyzed too. The different principle and applying conditions of real option approach and traditional method are compared.The option features of important investment projects are researched. The new viewpoint is taken about the pricing standards, approach and decision standards. Because of the advantages of real option in identifying and quantifying business opportunities value from uncertainty in dynamic business environment, the thesis designs an important investment projects decision approach based on real option theory. The approach includes seven steps: 1. if it is an important investment project, 2. identifying the option features in an important investment project, 3. choose and construct option pricing model, 4. parameters definition and how to get the parameters, 5. putting data into model and calculating, 6. taking decision based on the calculating result, 7. redesigning the option plan if necessary. Every step need to solve some questions to support the next step, and to help take final decision. And then, a practice case is as an example to explaining how to use the approach. The fact is verified that so many projects with great uncertainty in practice is underestimated in traditional method. But they include option value in real option method. Finally, the limitation and further research direction are indicated.