Research On The Application Of Real Option Theories In The Decision-making For Company H’s New Chemical Project

The competition the manufacturing firms are facing nowadays has becomemore and more volatile, complex and unpredictable. For any project investmentwith the long investment period and high uncertainty, it is critical for thedecision-maker of the firm to use the advanced techniques and approaches on theproject analysis and risk management so as to accurately evaluate the projectvalue and effectively support the right investment decision.In this paper, we use the research method combining theoretical descriptionwith empirical analysis. With a live case of the project investment decisions madeby H Company on its new chemical project, we study the effective application ofReal Option theory in corporation’s real decision making process. We also furtherdiscuss on the possible practice problems while applying Real Option approach inthe investment analysis and decision making.The paper is comprised of six parts:The first part explains the purpose as well as the significance of the studyand review the literature and achievements addressing Real Option and itsapplication by domestic and foreign scholars. It also briefly presents the contentsof the study and its basic framework.The second part gives an introduction to Rear Option theory, including theconcept, its key characteristics and its main types. The economic valuation modelof real option is discussed and reviewed.In third and fourth part, a real example of the investment decisions for a newchemical project made by H Company in east China is introduced in and thedecision making evaluation process for the corporate project investment isdiscussed. While traditional discounted cash flow evaluation techniques may beeasily and widely used by the corporate to provide a relatively accurateestimation of the economic contribution from an investment project, itslimitations and problem are obvious especially for the evaluation of the projectinvestment with a higher degree of uncertainty and more flexibilities in makingphased investment decisions according to market situation. The Real Optionanalysis, as a complementary approach to the traditional investment analysis should be applied. A basic framework of the practical application of Real Optionapproach as well as the step-by-step procedure is proposed.The fifth part is an important part of the paper. Through the evaluation andinvestment analysis for the decision making of H Company’s new projectinvestment, we compare the evaluation results of the Real Options analysis withthat from the traditional NPV analysis so as to illustrate the superiority andeffectiveness of Real Option method in the evaluation and decision makingprocess for the corporate project investment with a high degree of uncertainty.The sixth part is the summary of the whole paper. It gives the conclusion ofthis research and summarizes the lessons learned for applying Real Optionmethod in the actual project investment decision making. Some recommendationsare also given for the better application of the method for the project investmentevaluation in real corporate life.