Research Of Forestry Projects Investment Decision Based On Real Option Theory

Forestry is our country’s basic industries; forestry investment projects are one of the most important elements of the forestry business activities. The traditional investment analysis method is insufficient for a scientific and reasonable assessment on the forestry investment projects, due to the high initial investment, long recovery period and high uncertainty of cash flow. As a result, this requires that we need evaluate the projects scientifically by analyzing the characteristics of the forestry project in the project investment.Based on the researches of domestic and foreign, this paper first pointed out the defects of the traditional investment decision-making theory, such as without considering uncertainty in the project as well as "management flexibility", which can cause wrong investment strategic. So we introduced real options theory and concluded its applicability and superiority. Considering that the author firstly analyzes characteristics and scale of the project as well as the option’s nature of forestry investment projects and points out necessary for the introduction of the real option theory. In view of this, real options theory is introduced in the decision-making of forestry investment projects. Secondly, the article described the detailed contents about forestry investment decisions. And it summarized different real option types in the forestry investment projects during different stages because of uncertain, timing flexibility and management flexibility. Based on that, the Binary tree pricing method and the compound options model were applied in this paper according different lifetime period. And it was used to assess the value, including deferred option in the beginning of the project and management flexibility option during construction and operation period. Also the author pointed out the specific decision rules during different phases. At last in order to combine theoretic research with applied real projects, the author used case study, applying the model to a real forestry project and conclude that uncertainty in projects and flexibility on management could add value to forestry investment projects and investors with different decision strategy, to lay the foundation for scientific investment decision.