The use of fuzzy real option valuation method to rank Giga Investment Projects on Iran's natural gas reserves

Abstract

Giga investments are exposed to numerous syste­matic and unsystematic (or specific) risks that significantly influence their feasibility and value. In addition to the conventional issues and complexities in evaluating investment projects, factors such as long construction time, high amount of capital required and irreversibility of investment, increase uncertainty of cash flows in these types of projects. As a consequence, decision makers are usually not satisfied with the results of the most popular va­luation methodology – discounted cash flow analysis – in valuation of Giga investments. The most promising methodology of valuing flexibility in such investment projects is the real options valuation which quantifies the value of embedded flexibilities through option pricing techniques. In this paper, fuzzy real options valuation techniques are used to rank Giga project proposals faced in Iran's gas industry. To this end, different scenarios of project payoff and future uncertainties are quantified, using fuzzy numbers based on findings from earlier real option valuation methods.