Abstract
Recent commercialisation of property in the Kruger National Park was achieved by the tendering of various concession rights. South African National Parks generated scenarios of possible future cash flows for private lodges on the concession sites and identified what rental incomes they expected to receive from the different concessions. Following the public tender of the concessions, they found that they had grossly underestimated the value of the concession rights as the actual tender values of the winning bidders far exceeded their mean concession fee valuations.Through the use of random stochastic modelling and Monte Carlo simulation this research shows that real option valuation accounts for the positive difference between the winning bids and the mean concession fee values for each of the concessions investigated.
Highlights
DurandWits Business School, University of the Witwatersrand, PO Box 98, Wits, 2050, Republic of South Africa
In recent years, the discounted cash flow (DCF) framework has come under fire for failing to consider the options that are embedded in many new development projects (Damodaran, 2000)
The real option value attached to the concession rights that were tendered by South African National Parks (SANP) accounted for at least 68% of the difference between the winning bids and the mean concession value in four out of the five cases
Summary
Wits Business School, University of the Witwatersrand, PO Box 98, Wits, 2050, Republic of South Africa. Recent commercialisation of property in the Kruger National Park was achieved by the tendering of various concession rights. South African National Parks generated scenarios of possible future cash flows for private lodges on the concession sites and identified what rental incomes they expected to receive from the different concessions. Following the public tender of the concessions, they found that they had grossly underestimated the value of the concession rights as the actual tender values of the winning bidders far exceeded their mean concession fee valuations. Through the use of random stochastic modelling and Monte Carlo simulation this research shows that real option valuation accounts for the positive difference between the winning bids and the mean concession fee values for each of the concessions investigated
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