Ship Investment Decisions In The Real Options Applied Research

Shipping companies often make the decision to invest the ship, and the ship investment is the basis of shipping reproduction; the precondition of shipping. But unfortunately, the traditionally used Discounted Cash Flow(DCF) method is localized by its own limitations. In addition, ship investment has its own special characterizes other than other kind of investment, such as massive investment; long period for investment; many managerial flexibilities and so on. All these make it difficult to solve the problem of ship investment with traditional investment decision method. As concerned as that, I want to find a more suited and effective method to make ship investment decision, so I try to apply the Real Options method to the ship investment decision making. The Real Options method utilizes the ideas of financial options, treats the investment project as option, and to correctly price the managerial flexibilities that are hard to price with traditional method and is critical to the investment project. The utilization of the Real Options method can consider all kinds of characteristics of ship investment comprehensively, and objectively appraise the value of project. Even more, it can help shipping companies' decision-makers to avoid the eyeless ship investment for the reason of lacking the analytical tools.It is the originality that in the practical application of the Real Options method in ship investment in this article, I classified the diversified managerial flexibilities into four categories, which include laying-up or hiring-out conversion flexibility, quit flexibility, postponement flexibility, and increasing flexibility. I respectively established the frameworks and price models for corresponding real options (annual hiring option, abandonment option, waiting option and increasing option, and computed the value of real option in the given examples. The most creative idea in this article is that on the base of operation option I put forward the option of hiring or not, and consideringbreaking a new sea route, bring the strategically increasing option. In the last the article educes the conclusion that the Real Options method will help ship owners to make more effective and sensible decision. At the same time the article explains the problems in the process of modeling and applying the real options, and point out the development direction in the future.