Evaluation of Residential Project With Option to Delay

Subject Areas : Financial engineering

Hanzaleh Fendereski ¹ , Shapour Mohammadi ² , Ali Foroush Bastani ³ , Reza Raei ⁴

1 - Department of Finance and Insurance, Faculty of management, University of Tehran, Tehran, Iran
2 - Department of Finance and Insurance, Faculty of Management, University Of Tehran, Tehran, Iran
3 - Department of Mathematics, Institute for Advanced Studies in Basic Sciences of Zanjan, Zanjan, Iran
4 - Department of Finance and Insurance, Faculty of Management, University of Tehran, Tehran, Iran

Received: 2021-05-24 Accepted : 2021-08-21 Published : 2021-12-22

Keywords: real estate, Real Option, Black-Scholes Model, Cyclical Trend. Project Evaluation, Financial Option, Option to Delay, Binomial Lattice Model,

Abstract :

Real estate investment are characterized by low liquidity and irreversible cost. Real Estate industry is one of the most important industry in occupation. Moreover, its production has the biggest weight in family portfolio.These are important characteristics of real estate markets. Real estate industry has cyclical trend. In recession, investor delay their investment. Traditional capital Budgeting models such as Net Present Value are base on fix assumption and condition. They ignore management flexibility. In this paper residential Projects are evaluated with real options (option to delay) by Black-Scholes and Binomial Lattice Model.These model values managerial flexibility. Experimental results show that project Evaluation with real options outperforms the traditional models such as NPV. This paper studies the optimal timing of investment in an irreversible project where the benefits from the project and the investment cost follow continuous- time stochastic processes. According to optimal investment timing proposed by MC Donlad and Siegel, time to start this Project is 9/5 years from now.