Investment Decision Of Urban Steel Enterprise Based On Real Option Theory

Along with the economic development of the city, steel mills cannot meet the requirements of development of the city. Meanwhile, due to the restrictions urban land, environment, transportation and other conditions, urban steel are also facing the development bottleneck. Therefore, the urban steel enterprise have to settle “whether and when to relocate” issue urgently.City steel plant relocation project has the characteristics of large investment, long cycle and so on. At the same time, in the middle of the manufacturing process, facing the price of products, raw materials prices, fuel prices and other factors, such as the impact of price and other factors. Based on the discounted cash flow(DCF) method ignores the value of the interaction between uncertainty and management flexibility(increase profits or limit losses), tend to underestimate the value project. Application of real options(ROV) in the area of investment considering the uncertainty, irreversible and management flexibility mutual role value is effective complement to the DCF analysis method that can improve the rationality of decision-making.The paper reviews the real options theory, mathematical tools of quantification option value and traditional DCF analysis theory. Studying the option feature of integrated iron and steel enterprises investment from the perspective of characteristics, motivation, decision-making influence factors and external environment of iron and steel enterprise itself based the uncertainties and manager in an uncertain event solutions impact on cash flow. On the basis of existing real option evaluation model, this article selects appropriate pricing models considering various uncertain factors. Then it introduces the quantitative option value technology Least Squares Monte Carlo, to determine the specific parameters, to combine with probabilistic risk analysis, export the project investment value, profit probability and the optimal investment in, drawn from the visual angle of real option optimal investment rule.At last, taking the environment relocation project of the urban integrated steel mill as an example. We can come to a conclusion of the investment value, risk tolerance and sensitivity factors of a project using DCF. Then we can come to a conclusion optimal investment rule in the perspective of real options. We commit sensitivity analysis separately on product price, main raw material price, investment, and discuss the direction and degree of the effects that different variables and parameters impose on investment value, profit probability and optimal investing congress. And this paper analyses and explains the results of the two methods. Thereby, we can provide reference for decision better for the urban integrated iron and steel complex.