The Analysis of Investments

Abstract

Six case studies illustrate the accounting, discounted cash flow (DCF), expected net present value (ENPV) and real options investment analysis methods: A corporate software IT project – which considers the asset DCF, and the option to defer, the equivalent to a call option. A power generator valuation – using the DCF method and switching options, represented as a series of call options on the plant, which can identify the value flowing into a firm’s income statement. A pharmaceutical drug development – using DCF, ENPV and real options methods. A manufacturing firm – illustrates residual earnings and growth options and examines growth through innovation and the sustainability issues around climate change. The metamorphosis of a media firm – examines the abandonment option, with the exit from the firm’s existing operations to align its business model with the transformation to an information economy. The sale of commercial real estate assets – which analyzes the put real option in the deferring of an office property sale. The first, second, fourth and fifth case studies are hypothetical examples constructed to illustrate the industry issues and valuation methodologies. The third case study shows the various valuation methods used in the pharmaceutical and biotechnology industries, while the sixth case study appeared in the Real Estate Finance Journal.