Evaluate AL-MES Engineering Project Based On The Real Option

AL-MES project is an information system engineering project, this article is to assessthis project. AL company is a large-scale productive enterprise, in recent years as the businessgrowth, faced with the production management bottleneck. The manager of the productiondepartment proposed implementing MES (Manufacturing Execution System). MES implied inthe horizontal and vertical decomposition decision opportunities, that is to say, MES can beconstructed respectively according to different workshops and different fuction level. ALcompany can use horizontal decomposition decision opportunity to invest this project in twophases: in the first phase,AL company will construct MES in the health care product area inearly2011, if the operation goes smoothly in the next two years, AL company invest thesecond phase-implement the MES in nutrition food area in the early2013; Otherwise,terminate the investment. Therefore, AL-MES project contains real options so that it isdifferent from a general engineering investment projects. So, how to evaluate this project toprovide suggestion for AL company is the problems need to be solved in my article.On one hand, the real option method is better than the traditional discount cash flow as itconsiders the value of uncertainty and the flexible management (option value). consideringthe characteristics of the AL-MES project, this article suggests that the real option method forthis project evaluation is more reasonable. On the other hand, the traditional Capital AssetPricing Model is based on "rational" and "capital market is valid". But behavioral financeresearch shows that, the reality of capital market is not fully valid. Therefore, this researchwill use the Behavior Capital Asset Pricing Model (BAPM) to estimate the cost of capital ofAL-MES project.Firstly, through analyzing the background of AL-MES project, the author find thehorizontal and vertical decomposition decision opportunities of this project. And AL companycan use horizontal decomposition decision opportunity to create the dilated real option.So thereal option method is suit for this project.Secondly, based on BAPM theory and its applicationprocess and the estimating process of BSM, the author estimated that the capital cost is23.37%and the options value is8.40billion yuan. Thirdly, this article estimate the traditional netpresent value of this project is-3.06bellion yuan, then plus the value of the options value so that this research got the AL-MES value is5.34billion yuan.That is to say, this project cancreate value for AL company. Finally, consider the variability of the the market informationand possible deviation, the author made the risk analysis.Through single-factor andmulti-factor sensitivity analysis method, this article eventually got the conclusion that thisproject is feasible.This article based on the real-life background, by using real option theory, BehaviorCapital Asset Pricing Model, Black-Scholes Model and the direct method to estimates cashflow, estimated the value of AL-MES project,hoping to provide the reference for theinvestment decisions of AL company.