Research On The Application Of Real Option Theory In Environmental Protection Investment Decision

Environment protection has been drawing a lot of attention nowadays. It is a fact that China‘s fast-paced economic growth over all these years has been achieved by excessively exploiting natural resources, which led to a critical and severe nationwide pollution problem. This environment problem is destined to have a great extent of impact on individual business entities in the long run. Meanwhile, entities, when making investments decisions concerning the natural environment, have to take environmental consequences into account. However, the evaluation of short-term investment return both quantitatively on financial statements and qualitatively on ordinary operation is not quite available, which would interfere with implementation to mitigate environment damage. Standing from entities’ point of view, how to maximize foreseeable investments, is the primary interest for the research in this thesis. Among various valuation feasibilities in evaluation, operation and possible improvements. We focus on its principles, assumptions, and applications in real-life scenarios in different industries and economic conditions. By using this sensitivity analysis, we screen out the optimal investment. At the end, it is also pointed out that real option method has its inherent limitations, therefore we make suggestions on how to solve the resulting problems, including inserting governmental supervision on the economic level, perfecting the mechanism on the entity level, and strengthening the requirement for disclosure of entities’ environment assessments on the financial reporting level. We hope that real option will be more use for investment decision-making when it comes to the natural environment, as well as for future references and support in academic research.