Valuation Of Investment Projects Research Articles

Digital Transformation and Real Options: Evaluating the Investment in Cloud ERP

The purpose of this research is to explore and advance the knowledge regarding digital transformation. Toward this end, this paper is focused on the valuation of the assessment methodologies of cloud ERP projects. The investment in digitalization systems entails high levels of uncertainty, which gives these investment projects a high strategic value. The importance of emergent digitalization in ERP systems has made it necessary to use assessment tools that consider strategic information as well as financial information. In this paper, the real options methodology, specifically the option to defer, is proposed to account for the strategic value of investment projects in digitalization. In this sense, an empirical study is conducted by applying the binomial option pricing model to real data on the costs and revenue of investing in cloud ERP to study its viability.

The ways of formation and receipts of corporative investment projects

The paper defines the basic theoretical and modern methodological approaches to the formation and evaluation of the feasibility of corporative investment projects. These are formed by the organizational structure of investment projects support on the basis of the functional distribution. The efficiency valuation mechanism of the corporative investment project is developed. The model of multi-factor efficiency valuation of corporative investment projects is developed and functionally filled. It is proposed an algorithm for grouping corporative investment projects by efficiency criterion. The analysis of the existing indicators of investment efficiency showed the absence of a valuation indicator the innovative efficiency of investment projects. There are formulated the author’s interpretation of this concept and proposed three-component indicator, the risk and inflation components of which determine what part of the innovative effect of an investment project can be lost as a result of the manifestation, respectively, of risk factors and inflation. It was developed a model of investment project management “investments-risk”, based on the simultaneous formation of a calendar plan and technological budget, as well as determining the probability of occurrence of risk events, measures on the actions for the common goals of investment projects and the development of actions to respond to risks with the use of structural decomposition of works as a result of interrelated calculation of terms and value of investment projects. It was developed a model of investment project management “investments-risk”, based on the simultaneous formation of a calendar plan and technological budget, as well as determining the probability of occurrence of risk events, measures on the actions for the common goals of investment projects. The mechanism of efficiency valuation of investment projects can get a boost in the development by introducing indicators of social and environmental efficiency of the investment project and on this basis determining the social significance, which will improve the quality and objectivity of the general justification of the investment project and will allow to systematize the sequence of valuation.

ON THE PROBLEM OF IMPROVING THE PROCEDURAL FOUNDATIONS OF THE MARKET APPROACH TO DETERMINING THE COST OF DESIGN AND SCIENTIFIC DESIGN WORK

In many cases, construction objects differ in size, total area, number of floors, and materials used to manufacture structural elements, which leads to certain peculiarities in the pricing mechanism in construction, in particular in design and scientific design works. Construction objects according to a typical project will not have the same value depending on the location and local conditions of the construction site. In recent years, significant transformations have taken place in Ukraine in the field of pricing and assessment of the value of investment projects and programs. The development of market relations in Ukraine made it necessary to develop a modern methodology of pricing and cost management in construction, in particular, in determining the cost of design and scientific-project works, taking into account the best world experience and international standards. The efforts of many scientists and practitioners of Ukraine and abroad are aimed at solving this problem. The need to estimate the cost, design and scientific design works, as well as the construction of the object in general, arises in the early stages. However, at this stage, only approximate costs are determined, and as investigations are carried out and information is accumulated, new opportunities appear for calculating a more accurate estimate of the cost of the objects being designed. Therefore, the calculation of the cost of project works is mainly carried out individually according to the estimate, which specifies the scope of work, estimates, construction equipment and methods for specific types of work. Emphasizing the problems of the pricing system of project and scientific project works in our country, the organizational and economic problems of reducing the cost of investment and construction projects are considered. Including, by improving the efficiency of competitive selection of Investors, Contractors (construction agencies) and Suppliers of project products. An important issue is the issue of a comparative (market) approach to pricing in construction, in particular for design and research and design services. The market price is the prevailing price paid for project services in the project market for the relevant period in the sales process, regardless of the Manufacturer's individual costs. In the macroeconomic plan, prices are considered as the most important strategic criterion characterizing the market situation. Price changes are influenced by a number of price-forming factors. The basis of calculation procedures is the introduction of corrections for discrepancies between the object being evaluated and similar objects, the value of which is known. The same adjustments are permissible for a certain average market value. A significant problem remains the low level of practical use of project methodology. If the pricing policy is not properly formed, the project enterprise will not be able to achieve the intended goals; therefore, special attention should be paid to this issue.

Compound deferrable options for the valuation of multi-stage infrastructure investment projects

Multi-stage planning is common for expanding infrastructure complexes or networks. Previous real-option studies developed a sequential compound call option (SCCO) for evaluating multi-stage infrastructure investment projects, including evaluating abandonment options during individual pre-scheduled investment stages. In practice, however, investment schedules involve risk and uncertainties forcing investors to change plans, raising an important issue regarding investors having more options at each commencement date. This study introduces a new model, the sequential compound deferrable call option (SCDCO), incorporating deferment options for each fold in an n-fold setting and generalizing the exercise of each deferment option into mn periods. A closed-form solution to the valuation of SCDCO is derived accordingly. A real-world case demonstrates that introducing deferment options increases project value, but the marginal benefit of increasing deferment time diminishes. The presence of dedicated assets for the usage of future expansions can also increase project value, but this increase is restricted by deferment options. Furthermore, the investment cost growth with an increase of deferment time rapidly decreases project value and vice versa. Inflation or deflation is therefore important to consider in deferment decisions. Finally, although deferment options only produce limited project value, they have the flexibility to manage risks, changes, and budgetary constraints.

Economic Evaluation of Investment Projects: Determining the Key Factors for Final Investment Decision

Evaluation of investment projects is a crucial part of the investment decision-making process. Although dynamic evaluation techniques are precise and theoretically correct, they can still lead to the wrong investment decision. The main goal of this study was to identify the key drivers of investment projects’ profitability from the point of view of the company, municipality and society. Data on 26 investment projects were gathered and analyzed. The results of the principal component analysis (PCA) showed that the net present value, when compared to the internal rate of return and discounted payback period, represents the key indicator of the profitability of investment projects. Also, PCA showed that the total sales and total costs, when compared to the initial investment and discount rate, represent the key factors that affect the profitability of investment projects. Regression analysis (OLS) confirmed these results since the total sales and total costs have the highest and statistically significant effect on the net present value of investment projects.

Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options.

Aquaculture is an increasingly relevant sector in the exploitation of natural resources; therefore, it is appropriate to propose various models that include the fundamental variables for its economic-financial valuation from a business point of view. The objective of this paper is to analyze different models for the valuation of investment projects in a company in the aquaculture sector in order to conclude whether there is a model that represents a better valuation. Therefore, in this study, four valuation models have been applied, three classical models (net present value, internal rate of return, and payback) and a more recent model, real options (RO) for a company producing and marketing seaweed in Galicia (region located in the northwest of Spain). The results obtained, RO (€5,527,144.04) and net present value (€5,479,659.19), conclude that the RO model estimates a higher added value by taking into account in its calculations the flexibility given by the expansion option. Future lines of research include the application of valuation models that have been applied to companies belonging to the same sector in order to compare whether the results found are similar.

Valuation of Wind Energy Turbines Using Volatility of Wind and Price

The limitedness of the nonrenewable local energy resources in Israel, even in the background of the later gas fields’ findings, continues to force the state to devote various efforts towards ‘green’ energy development. These efforts include installations, both for the solar and for wind energy, thus improving the diversity of energy sources. While the standard discounted cash flow (DCF) method using the net present value (NPV) criterion is extensively adopted to evaluate investments, the standard DCF method is inappropriate for the rapidly changing investment climate and for the managerial flexibility in investment decisions. In recent years, the real options analysis (ROA) technique has been widely applied in many studies for the valuation of renewable energy investment projects. Taking into account the above background, we apply, in this study, the real options analysis approach for the valuation of wind energy turbines and apply it to the analysis of wind energy economic potential in Israel, which is the context of our work. We hypothesize that due to nature of wind energy production uncertainties, the ROA method is better than the alternative. The novelty of this paper includes the following: real world wind statistics of the Merom Golan site in Israel (velocity 3.73 m/s, with a standard deviation of 2.03 m/s), a realistic power generation estimation (power generation of 1205.84 kW with a standard deviation of about 0.5% in annual value which is worth about 1.3 M$ per annum), and an economic model to evaluate the profitability of such a project. We thus discuss the existing challenges of diversifying renewable energy sources in Israel by adding wind installations. Our motivation is to introduce a method which will allow investors and officials to take into account uncertainties when deciding in investing in such wind installations. The outcomes of the paper, which are obtained using the method of Weibull statistics and the Black–Scholes ROA technique, include the result that market price volatility adds to the uncertainties much more than any wind fluctuations, provided that the analysis is integrated over a long enough time.

The standing of foreign lenders in cost-benefit analysis: some implications for environmental appraisals

ABSTRACT International loans often finance projects with environmental benefits and costs. Cost–benefit analysis (CBA) is the default tool to determine the societal economic value of investment projects or policies producing environmental externalities. Standing in CBA concerns whose benefits and costs count in the calculation of societal value. Common practice is to grant standing only to nationals of the country hosting the policy or investment project under appraisal. Foreign lenders therefore do not stand. The social opportunity cost (SOC) approach to the social discount rate (SDR) addresses foreign loans. In the SOC approach, the SDR incorporates the opportunity cost of foreign loans associated to a marginal change in government borrowing, while foreign lenders implicitly do not stand. However, the literature has not addressed the treatment of foreign loans in appraisals following the social time preference (STP) method of discounting. This paper argues that CBA appraisals following the STP approach to the SDR would need to model loan cash flows explicitly as the loan itself may be a source of societal gain or loss. It then discusses implications for projects with long-term benefits or costs and with cross-border externalities, epitomising environmental appraisals. A case study of a forest harvesting project is also included.

Possibilistic fuzzy pay-off method for real option valuation with application to research and development investment analysis

This paper presents the first fully possibilistic method for real option valuation of investment projects, a new possibilistic variant of the fuzzy pay-off method for real option valuation. The new variant is derived by using the Luukka-Stoklasa-Collan transformation and is proven to be consistent with financial theory. The new variant is comparatively analyzed with the original method and the previously presented probabilistic variant. Fast computation formulae for the new variant in all use-cases in the triangular context are presented and complete fast computation formulae also for the previously presented probabilistic variant of the method are presented for the first time. The use of the new variant is illustrated with a set of numerical examples including examples of Research and Development investment analysis.

Sustainable Investment Project Evaluation

This paper concerns a current problem of multifaceted evaluation of investment projects. Information that contains the actual value of the initiated investment is often the basis for making decisions regarding its further implementation, especially when significant changes occur in the project’s environment. The process of project evaluation should therefore include all factors that may affect its value. However, there is a research gap regarding the insufficient development of methods of commercial real estate investment evaluation that integrate quantitative (financial) approaches and qualitative factors that influence the value of project, and also refer to the achievements in the scope of project management. The purpose of this paper is to introduce the integrated method of investment project evaluation based on the common valuation method (an income approach), supplemented by the results of the implementation of the Real Options Method (ROM) and complemented by the project sustainability factor. Case studies were carried out to prove that an exit option (resignation) can support the ongoing evaluation of the investment. Individual in-depth interviews (IDI) were conducted to examine the sustainability impact on its value. Three case studies involving commercial properties have verified the possibility of applying the proposed integrated method. The following findings were discovered as a result: nowadays, in the turbulent project environment, the common investment project valuation methods need to be extended to support the managerial decision regarding their further implementation and the securing of their flexibility. Also, sustainability has been recognized as a factor that increases the project value, which should be taken into account during the evaluation process. A comparative analysis indicates that the accuracy of the proposed new method delivers a more precise determination of the investment value than the common valuation methods.

The Re-emergence of the Residual Income Model in the Valuation of Firms and Investment Projects

Residual income valuation was already known and used in valuation theory and practice previously, however, the method has been subject to increasing attention in the past decades. By comparing the discounted cash flow method and the residual income model, this paper seeks to answer the question of what practical implications the difference in theory results in. the discounted cash flow method continues to be widely popular in literature and international practice, however, it may give rise to flawed results in certain cases. with the help of specific business examples, the study highlights that in such cases, the risks of under or overestimation can be mitigated with the help of the rim model. the largest benefit of the residual income model compared to the dcf method is that instead of deriving the value solely from the future, it gives a central role to the already known book value, and the speculative value – determined based on the accounting income – plays a less significant role in the course of valuation.

Why Bother with Risk Management when Idiosyncratic Risk Doesn't Matter?

Firms seem to care a lot about management: the practice of hedging risks whether they are correlated with market risk or not. The standard reasons why widely held corporations might be averse to idiosyncratic risk are based on the principal-agent problem, bankruptcy costs, external finance, and tax convexity. This paper offers a different reason: idiosyncratic risk makes business decisions more difficult. Risk can increase the value of investment projects because of option value. We must distinguish, however, between risk over the expected value of profits (value risk) and risk over the volatility of cash flows (cash-flow noise). Value risk is good because an unprofitable policy can be abandoned. Cash-flow noise is bad because it makes learning when to abandon more difficult. This distinction is unrelated to Knightian risk or ambiguity aversion, and it matters even if the firm's agents are risk neutral.

Analysis of firm dynamic green energy investment strategy - application of real options

This paper mainly adopts the Real Options Approach (ROA) to construct a dynamic green energy investment strategy analysis model for firms that reduce carbon emission during production to meet the government’s policy, to provide optimal investment opportunities and to evaluate the value of investment projects. Recently, governments around the world have formulated environmental protection policies to reduce greenhouse gas emissions. Under the implementation of polluter pays, the carbon emissions produced by firms are no longer free riders. When the government implements restrictions on carbon emissions the carbon emission limits will affect corporate investment decisions. This article assumes that there are uncertainties in production volume and carbon emissions, and the change follows the geometric Brownian motion. The carbon emission trading will be conducted according to the market supply and demand status when a firm’s carbon emissions exceed or fall below the prescribed emissions. Under this premise, this paper constructs the most appropriate investment strategy model and analyses the investment decision threshold for the firm from a financial point of view to evaluate the corporate value. It serves as a reference for a firm’s green energy investment and provides the government with a reference policy for carbon emissions, and with a view to creating a business, government, and social environment tripartite win-win situation.

Competing with Whom? For What? And How? The Great Fragmentation of the Firm, FDI Attraction Profiles, and the Structure of International Tax Competition in the European Union

International tax competition is generally framed as states competing for foreign direct investment (FDI), and analyses of the phenomenon draw heavily on FDI statistics. In and of themselves, however, FDI statistics are merely a quantification of the value of investment projects and tell us little about the heterogeneity of these projects and the distinct patterns of competitive dynamics between countries they generate. In this article, we create a more sophisticated understanding of international tax competition by pointing out its variegated nature. To do so, we introduce the notion of the “great fragmentation of the firm” to distinguish between five categories of FDI: manufacturing affiliates, shared service centers, R&D facilities, intermediate holding companies and top holding companies. Using a novel combination of firm-level and country-level data, we identify for each of these different categories of FDI which European Union member states are most successful in attracting it, what macro-institutional and tax arrangements they use to do so, and what benefits they receive from it in terms of tax revenues and employment creation. In this way we were able to identify five distinct FDI attraction profiles and show that, rather than being a game of all against all, tax competition in the European Union increasingly takes place amongst subsets of countries that compete for similar categories of FDI.

Use of Selected Derivatives For Valuation of Mining Investment Projects

The article is devoted to the issue of valuation of mining investment projects (with the use of the Monte Carlo method) via selected derivatives. The purpose of using such instruments in the process of valuation is to secure the revenue of a mining company by guaranteeing raw material prices. According to the authors of the publication, the use of such instruments will help reduce the variability of obtained results and increase their reliability. The article consists of four parts. The introduction to the article specifies the purpose of the work. The second part of the article presents the foundations for the analysis, the purpose of which is to compare the obtained results ofthe investment value for three variants. The first one assumes the use of financial options to secure raw material prices, the second assumes the use of futures, and the last one stipulates that the company does not take action with respect to securing raw material prices. The third part presents the results of the study. Due to the availability of data, sample calculations were carried out on the basis of the financial information published by a copper manufacturer. The obtained results show that from the point of view of the value of the investment and the risk of negative investment value, the most advantageous method is to secure the prices of raw materials in the process of valuation of mining investment projects with the use of options. The last part of the work is a summary presenting the conclusions of the analysis. The article is accompanied by a list of literature used to prepare this study.

Valuing strategic investments under stochastic interest rates: A real option approach

One of the most challenging issues in management is the valuation of strategic investments. In particular, when undertaking projects such as an expansion or the launch of a new brand, or an investment in R&D and intellectual capital, which are characterized by a long-term horizon, a firm has also to face the risk due to the interest rate. In this work, we propose to value investments subject to interest rate risk using a real options approach (Schulmerich, 2010). This task requires the typical technicalities of option pricing, which often rely on complex and time-consuming techniques to value investment projects. For instance, Schulmerich (2010) is, to the best of our knowledge, the first work where the interest rate risk is considered for real option analysis. Nevertheless, the valuation of investment projects is done by employing binomial trees, which are computationally very expensive. In the current paper, a different modeling framework (in continuous-time) for real option pricing is proposed which allows one to account for interest rate risk and, at the same time, to reduce computational complexity. In particular, the net present value of the cash inflows is specified by a geometric Brownian motion and the interest rate is modeled by using a process of Vasicek type, which is calibrated to real market data. Such an approach yields an explicit formula for valuing various kinds of investment strategies, such as the option to defer and the option to expand. Therefore, the one proposed is the first model in the field of real options that accounts for the interest rate risk and, at the same time, offers an easy to implement formula which makes the model itself very suitable for practitioners. An empirical analysis is presented which illustrates the proposed approach from the practical point-of-view and highlights the impact of stochastic interest rates in investment valuation.

Sustainable Value of Investment in Real Estate: Real Options Approach

The issue of application of real option valuation approach in the valuation of investment project is presented in the article in a way in which the flexibility of the project could be included in the process of its valuation. The authors apply the valuation approach in case of a specific investment project in the real estate in the capital city of the Czech Republic—Prague, using the option to expand, to contract, and to abandon the project. The main aim of this case study is to present a practical application of the investment valuation and to construct an option pricing model for real estate investment which considers and integrates as many aspects of the investment and market environment as possible to describe the best situation of the real estate market and its development. The valuation of the investment is carried out using a universally applicable numerical method of binomial trees. The results obtained are subjected to the sensitivity analysis with respect to the discount rate, value of the most influential parameter of the volatility and the input option parameters. The results of the valuation of the project obtained using the real option approach are important mainly for the management of the company in the process of quantification of the present value of future investments. Implementation of managerial interventions enables for optimizing the value of the project not only in case of favourable development of the real estate market, but particularly in case of unfavourable development. Therefore, they are important in order to protect an investor from potential high losses. Finally, the valuation of these interventions increases the present value of the project, contributing to the decision of the corporate management regarding its implementation.

Current Issues in Assessment of Risks Related to Investment Projects

The definition of the essence of an object of management in economics is an indispensable component of professional risk management. Since the national risk management theory is just being formed, the need to find a clear and comprehensive definition for the notion "risks" is especially topical. Capital valuation is one of the most important issues, which needs to be solved by companies during ROI studies. This article makes an attempt to study the role of risk management in the implementation of investment projects. The main purpose of this article is to identify the main regularities which determine the peculiarities of risk assessment in business, being the key element facilitating the organization of investment projects. The objectives have been as follows: to review the basic concepts of risk management; to study its components in business; to reflect the system and risk management principles, and to carry out risk assessment; to consider the main kinds of risks in the business area.The article describes various types of investment and project risks, risk analysis methods for investment projects, as well as efficiency indicators of investment projects, and provides an analysis of risk factors and uncertainties during the development of investment projects. The peculiarities of the practical use of project risks’ analysis methods have been studied. Risk assessment methods for an investment project help evaluate its feasibility, the time within which it will start being profitable, as well as the probabilistic volume of its future profits. Investment project valuation models have been analyzed, in particular, the CAPM model for emerging capital markets. The DCF method has been studied, being the base for assessing the attractiveness of business in general and a company's investment project in particular.

Capacity investment under uncertainty: The effect of volume flexibility

Real option theory is a central tool in today's investment theory as it integrates uncertainty and managerial flexibility in the analysis and valuation of investment projects. This paper studies the optimal time and size of investment for a monopolistic firm under demand uncertainty and volume flexibility. In our modeling framework, demand is random and the firm first decides the optimal time and size of the production process. After entry, the firm adjusts continuously production volume to match the observed demand. Volume flexibility comes at a cost which depends on both the current output and the established capacity. We study two different models of volume flexibility: Downside volume flexibility allows the firms to produce any quantity below the installed capacity; Upside volume flexibility allows to expand production above the firm's capacity size. In both cases, the option to temporary suspend production is not given a priori, but it is part of the firm's optimal choice. With this feature, the model provides conclusions that contrast some of the most recent theoretical findings on the same subject. We find that an increase of the degree of downside volume flexibility makes the firm willing to invest earlier in a larger plant. We also show that downside volume flexibility reduces the utilization rates, especially in highly uncertain markets. Upside volume flexibility has the joint effect of reducing the size of the investment and the investment threshold at which the firm installs capacity. The utilization rates are significantly higher compared to the case of downside volume flexibility only, and there is an increasing relationship between increased upside flexibility and utilization rates.

A multifactor approach to the social discount rate: An application to the Spanish forest system

ABSTRACTThis paper focuses on the calculation of the social discount rate to be used in the valuation of long-term investment projects and, more specifically, in the appraisal of public and environmental projects. The key idea is that the instantaneous discount rate of the discount function used for valuation must be equal to the hazard rate of the public good or the mortality rate of the population affected by the project. Previously, this approach has been applied by the authors to a system in which failure depends on a single component, but in this paper, we are going to consider the failure of several independent components which, in combination, give rise to a multivariate hazard rate. In our empirical application, the entire forested area of Spain will be the system, and the forests of the seventeen autonomous communities will be considered the components of the system; the forest fire will be the failure, measured by the number of hectares devastated by fire in each region. Finally, once the failure corresponding to all regions has been aggregated in a multivariate hazard rate, it will be implemented as a part of the social discount rate.