Capturing the Strategic Flexibility of Investment Decisions Through Real Options Analysis

Mun, Johnathan

doi:10.1007/978-3-642-04349-9_5

Cited by 40 publications

(79 citation statements)

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“…The volatility (σ) can be obtained by applying the logarithmic cash flow returns approach to the cash flow of future returns by the FCF investment. The volatility is calculated by Equation (2) [23].…”

Section: Methodsmentioning

confidence: 99%

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Economic Assessment of Flood Control Facilities under Climate Uncertainty: A Case of Nakdong River, South Korea

Kim

2018

Sustainability

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Abstract:Climate change contributes to enhanced flood damage that has been increasing for the last several decades. Understanding climate uncertainties improves adaptation strategies used for investment in flood control facilities. This paper proposes an investment decision framework for one flood zone to cope with future severe climate impacts. This framework can help policy-makers investigate the cost of future damage and conduct an economic assessment using real options under future climate change scenarios. The proposed methodology provides local municipalities with an adaptation strategy for flood control facilities in a flood zone. Using the proposed framework, the flood prevention facilities in the Nakdong River Basin of South Korea was selected as a case study site to analyze the economic assessment of the investments for flood control facilities. Using representative concentration pathway (RCP) climate scenarios, the cost of future flood damage to 23 local municipalities was calculated, and investment strategies for adaptation were analyzed. The project option value was determined by executing an option to invest in an expansion that would adapt to floods under climate change. The results of the case study showed that the proposed flood facilities are economically feasible under both scenarios used. The framework is anticipated to present guidance for establishing investment strategies for flood control facilities of a flood zone in multiple municipalities' settings.

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Section: Methodsmentioning

confidence: 99%

“…The option values are calculated by the formulation of the up (u) and down (d) movement per node in the binomial lattice approach, calculated by Equations (5) and (6), respectively [23].…”

Section: Methodsmentioning

confidence: 99%

Economic Assessment of Flood Control Facilities under Climate Uncertainty: A Case of Nakdong River, South Korea

Kim

2018

Sustainability

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“…The critics of the literature suggest that RO are difficult to value with certainty and the methodology is complicated but Mun argues that " traditional approaches assume a statistic decision-making ability, while real options assume a dynamic series of future decisions where management has the flexibility to adapt given changes in the business environment" [6]. The volatility is often the variable that has the most important impact on the option value.…”

Section: Real Options Analysis (Roa)mentioning

confidence: 99%

A real options and joint ventures perspective for strategic decision-making process in the case of dynamic industrial environments

2017

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Abstract. Strategic decision -making process represents a challenge in a dynamic industrial environment. Nowadays, many instruments and techniques are used in the process of decision-making. The perspective regarding real options analysis (ROA), joint ventures (JVs) and strategic decision-making process (SDMP) is very important to be analyzed because it represents a key source to obtain competitive advantage in a turbulent environment characterized by competitiveness, dynamism and a proactive thinking. The aim of the paper is to offer an interesting framework that emphasizes the relationship between real options (ROs), JVs, transaction cost (TC), bargaining models (BM), agency theory (AT) and SDMP. Also, the paper analyzes a real case study and it suggests a business model that includes elements that conduce to an innovative management. The findings are very useful for decision-makers from organizations, researchers and students.

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“…The following examples are a sample of the variety of real option opportunities. Several were motivated by examples provided by others [2], [6], [12], and [16]. Example 16 is based on one by Triantis [16].…”

Section: Example 14 Analyzing Sensitivity Of Decision To Changes In Vmentioning

confidence: 99%

“…We used Excel to calculate option values, but, when mT was greater than 100, we seldom were able to obtain a solution. In [12], Mun describes several heuristic approaches, incorporated in software he developed, used to approximate binomial option values.…”

Section: Example 20 Valuing An Option With More Than Two Choicesmentioning

confidence: 99%

Using a Real-Options Analysis Tutorial in Teaching Undergraduate Students

White¹

2016 ASEE Annual Conference &Amp; Exposition Proceedings

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An undergraduate tutorial on real-options analysis used in teaching an advanced engineering economy course is presented. The tutorial includes the binomial option pricing model and the Black-Scholes model. Reasons for using real-options analysis are included, as well as examples of calculations of the values of financial options and real options for a variety of investment scenarios. Implications of real-options analysis on the way engineering economy is taught are also treated. Specifically, the need to incorporate multiple discount rates, continuous compounding, and terminal value analysis in economic justifications is addressed. Lessons learned are shared from using the tutorial in 2015 and 2016.

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Capturing the Strategic Flexibility of Investment Decisions Through Real Options Analysis

Cited by 40 publications

References 1 publication

Economic Assessment of Flood Control Facilities under Climate Uncertainty: A Case of Nakdong River, South Korea

Economic Assessment of Flood Control Facilities under Climate Uncertainty: A Case of Nakdong River, South Korea

A real options and joint ventures perspective for strategic decision-making process in the case of dynamic industrial environments

Using a Real-Options Analysis Tutorial in Teaching Undergraduate Students

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