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on Project, Program and Portfolio Management |
| By: | Lawrence, Craig; Thomas, Mathew |
| Abstract: | This paper illustrates the use of real options principles to value prototypical resource and industryinvestment projects. It captures important competitive/strategic dimensions in a step-by-stepanalysis of investment decisions (options) under uncertainty. It compares and contrasts staticdiscounted cash flow analysis (DCF) with real options analysis using three case studies. The initialexample values a resource extraction process using static DCF and then compares the projectvaluation when future information is valued and acted upon. The second example considers a coaldevelopment and uses the binomial valuation approach to capture the option value associated withhaving the right but not the obligation to exit the development. It contrasts this valuation approachagainst static DCF and highlights that future royalty payments could be underestimated if based onthe standard DCF valuation. The third example analyses the impact of providing a subsidy forhybrid vehicle production to accelerate potential uncertain environmental benefits. Lastly, thesuitability of the standard financial and economic evaluation tools used by treasury agencies isconsidered when projects contain real options. |
| Keywords: | financial economics; investment decisions; public economics; externalities; subsidies; project evaluation |
| JEL: | H10 G11 H43 H23 G10 |
| Date: | 2008–06–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:11915&r=ppm |
| By: | Fabrizi, Simona (Massey University Auckland); Lippert, Steffen (Massey University Auckland); Norbäck, Peh (Research Institute of Industrial Economics (IFN)); Persson, Lars (Research Institute of Industrial Economics (IFN)) |
| Abstract: | In this paper we construct a model in which entrepreneurial innovations are sold into oligopolistic industries and where adverse selection problems between entrepreneurs, venture capitalists and incumbents are present. We show that as exacerbated development by better-informed venture-backed rms is used as a signal to enhance the sale price of developed innovations, venture capitalists must be sufciently more ecient in selecting innovative projects than incumbents in order to exist in equilibrium. Otherwise, incumbents undertake early preemptive, acquisitions to prevent the venture-backed rms' signaling-driven investment, despite the risk of buying a bad innovation. We nally show at what point the presence of active venture capitalists increases the incentives for entrepreneurial innovations. |
| Keywords: | Venture Capitalists; Innovation; Entrepreneurs; Signaling; Development; |
| JEL: | C70 D21 D82 G24 L20 M13 O30 |
| Date: | 2008–11–06 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0776&r=ppm |