Application of Real Option approach for optimizing Venture Capital

Subject Areas : Financial engineering

farshid moradi ¹ , reza tehrani ² , Mansour Momeni ³ , Shahabeddin Shams ⁴

1 - Ph.D. student of financial management, Faculty of Management, Alborz campus, Tehran University, Tehran, Iran.
2 - Department of financial management, Faculty of Management,Tehran University, Tehran, Iran.
3 - Department of industrial management, Faculty of Management, Tehran University, Tehran, Iran.
4 - Assistant Professor, department of Business Management (Finance), Mazandaran University, Iran

Received: 2019-06-02 Accepted : 2019-07-28 Published : 2019-12-22

Keywords: Capital budgeting, Venture Capital, Real options, stochastic processes,

Abstract :

Application of traditional approaches based on Discounting the cash flow in order to evaluate and comparing investment opportunities including Venture Capital in most industries is a very common issue. Due to the lacking deep certainty in this sort of venture, relying on traditional approaches could end up with inappropriate decision making, because of ignoring the managerial flexibility. At this study the real option approach in estimated capital budgeting was compared with traditional approach based on Discounting the income. The research hypothesis was that the real option approach could improve the quality of decision making and optimize the investing portfolio from the high risk projects. Accordingly, a venture capital company in the field of pharmaceutical products and medical and therapeutic equipment was chosen for applying the model considering two indicators of the availability and completeness of the financial information of the plans by using the case study approach. The results indicated that considering the value of flexible deciding, the efficacy of the capital budgeting model based on dynamic planning and real options shows more precision than traditional budgeting approach.

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