Application Of Real Option Theory In Investment Analysis Of Leased & Operated Hotel Chain

Budget hotels in China usually operated as leased and operated chain stores, which means that investment in a new project usually brings in growth opportunities. Meanwhile, China budget hotel industry is in fierce competition, with various uncertainties, which traditional investment evaluation method doesn’t take into account the impact of. Therefore, real option method will be a good supplementary in dynamic opportunity management to the investment evaluation of China budget hotel new project investment.This thesis will summarize the existing investment evaluation method and discuss about the application of a modified investment evaluation model with real option theory.This thesis will discuss the suitability of a capital budgeting framework with real option concept in chain store investment planning and evaluation, based on a real life case study of Huazhu hotel group, which is a top 3 budget hotel group in China, including: how to identify the real options in a project, how to quantify the value of the real options, how to create a model or framework for investment planning and evaluation, and the impact of the new framework to the strategic decision making, business operation and performance evaluation.Application of real option to the capital budgeting process of budget hotel group is proved to be valuable. Compared with traditional evaluation method, which is static, real option theory taking into consideration the additional value to the enterprise created by uncertainty and opportunity, which will transform conceptual framework of traditional capital budgeting. Bringing real option concept into capital budgeting will promote the coordination of financial analysis with the strategic decision of the enterprise, beneficial for long-term dynamic planning. Although the complexity of uncertainty, and the difficulty in quantify the value of opportunities block the mass implementation and popularization of the new model with real option theory, implementation of the theory add flexibility to management decisions, leading them to a right direction.