Investment Project Valuation Using Real Option Approach(The Case of a 500 MV Power Generation Plant)

Subject Areas : Journal of Investment Knowledge

Mortaza Baky Haskuee ¹ , Rojin Davoodi ²

1 - استادیار دانشکده اقتصاد دانشگاه علامه طباطبایی
2 - کارشناسی ارشد مهندسی مالی، دانشگاه غیرانتفاعی رجاء قزوین

Received: 2015-11-10 Accepted : 2016-01-26 Published : 2016-03-20

Keywords: Investment Evaluation, real option, Traditional Investment Evaluat, Monte Carlo simulation,

Abstract :

Dynamic and complicated circumstances of economic activities, and consequently increase in risks require an efficient analytical method of investment and financing decision making in which does not suffer from traditional methods shortcoming such as stationarity. Real option analysis developed in response to this requirement.This paper provides a framework to study advantage of using real option theory in evaluating power generation projects in comparison to traditional methods. First, it uses abandon option and its different real option pricing methods, then compares to traditional methods. To compare traditional and real option methods, it uses Monte Carlo simulation.The results show that real option pricing methods do not differ significantly, because when time steps increase, option value increases and all methods converge. Monte Carlo simulation results show that in real option methods risk decreases and return increases in comparison to traditional methods.

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