Abstract
We discuss the valuation of investment project in a firm applying a real option method with abandonment and reset investment proportion. We take the depreciation value of the facilities and the research and development (R & D) fee into consideration. Our contribution is to derive a pricing model of two-stage optimal decisions allowing abandonment and reset investment proposition. Different from the net present value (NPV) or discount cash flow (DCF), the real option method can efficiently catch the uncertainty in the market, and it can help managers to make the optimal policy for the project. We can improve our method for a multi-stage decision model or a continuous decision model in the further researches.
Highlights
We discuss the valuation of investment project in a firm applying a real option model with abandonment and reset investment proportion
We focus on deriving a pricing model of two-stage optimal decisions allowing abandonment and reset investment proposition in this study
The traditional method to evaluate a project is through the net present value (NPV) or discount cash flow (DCF)
Summary
We discuss the valuation of investment project in a firm applying a real option model with abandonment and reset investment proportion. We focus on deriving a pricing model of two-stage optimal decisions allowing abandonment and reset investment proposition in this study. The traditional method to evaluate a project is through the net present value (NPV) or discount cash flow (DCF). (2014) The Project Valuation with Abandonment and Reset Investment Proportion Applying Real Option Method. Because of the maturation of appropriate valuation models in barrier options and reset options recently, we could apply the concepts of barrier options and reset options to evaluate a project and derive the valuation of two-stage decision model, which can extend or reduce the scope of a project in the policy-making point.
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