Browse > Article

Investigation of the Structure of the Strategic Net Present Value and Its Economic Interpretation through the Opportunity Cost Concept  

Kim, Gyutai (Department of Industrial Engineering, Chosun University)
Choi, Sungho (Department of Industrial System Engineering, Kangnung University)
Publication Information
Journal of Korean Institute of Industrial Engineers / v.29, no.2, 2003 , pp. 126-134 More about this Journal
Abstract
Among a variety of models proposed by so far to calculate the real options value when the investment decision about the underlying project may be delayed, the Black-Scholes and the binomial lattice models have been widely used and discussed by academics and practitioners. However these two models do not provide us with intuition into how it is constructed and what it does really mean. In this paper, we will therefore explore its components and practically more intuitive meaning. With the components explored, we developed the mathematical model to calculate the real options value and thus strategic net present value, based on the opportunity cost concept, for which the investment decision about the underlying project is postponed by one year. We will finally present a short illustrative example for readers better understanding on the model proposed in the paper.
Keywords
real options value; opportunity cost; strategic net present value; binomial lattice option pricing; investment decision;
Citations & Related Records
연도 인용수 순위
  • Reference
1 Copeland, T. and Antikarov, V. (2001), Real Options: A Practitioner's Guide, Texere, NY
2 Hull, J. and White, A. (1988), The Use of The Control Variate Technique in Option Pricing, Journal of Financial and Quantitative Analysis, 23(3), 237-252   DOI   ScienceOn
3 Myers, S. C. (1977), Determinants of Corporate Borrowing, Journal of Financial Economics, 5(Nov), 147-175
4 Sick, G. (1989), Capital Budgeting with Real Options, Salomon Brothers Center, New York University, NY
5 Black, F. and Scholes, M. (1973), The Pricing of Options and Corporate Liabilities, Journal of Political Economy, 81, 637-659
6 Smith, J. E. and McCardle, K. F. (1999), Options in The Real World: Lessons Learned in Evaluating Oil and Gas Investments, Operations Research, 47(1), 1-15   DOI   ScienceOn
7 Kulatilaka, N. and Perotti, E. C. (1998), Strategic Growth Option, Management Science, 44(8), 1021-1031   DOI   ScienceOn
8 Smith, J. E. and McCardle, K .F. (1998), Valuing Oil Properties: Integrating Option Pricing and Decision Analysis Approaches, Operations Research, 46(2), 198-217   DOI   ScienceOn
9 Cox, J. c., Ross, S. A., and Rubinstein, M. (1979), Option Pricing: A Simplified Approach, Journal of Financial Economics, 229-263
10 Kim, Gyutai and Kim, Yoonbai (2001), Pricing Real Options Value Based on The Opportunity Cost Concept, Korean Management Science, 18(1),29-39
11 Cox, J. C. and Rubinstein, M. (1985), Options Markets, PrenticeHall Inc., Englewood Cliffs, NJ
12 Smith, J. E. and Nau, R. F. (1995), Valuing Risky Projects: Option Pricing Theory and Decision Analysis, Management Science, 41(5),795-816   DOI   ScienceOn
13 Dixit, A. K. and Pindyck, R. S. (1994), Investment Under Uncertainty, Princeton University Press
14 Kim, J.W. (1995), Comparing An Option-Based Valuation and NPV Approach, Proceedings of '95 KIIE Conference, 156
15 Rao, K. S., and Martin, J. D. (1981), Another Look At The Use of Options Pricing Theory to Evaluate Real Asset Investment Opportunities, Journal of Business Finance & Accounting, 8(3), 421-429   DOI
16 Geske, R. (1979), The Valuation of Compound Options, Journal of Financial Economics, 7, 63-81
17 McDonald, Rand Siegel, D. (1986), The Value of Waiting to Invcst, Quarterly Journal of Economy, 707-727
18 Ingersoll, J. E., and Ross, S. A. (1992), Waiting to Invest: Investment and uncertainty, Journal of Business, 1-30
19 Miller, L.T. and Park, Chan S. (2002), Decision Making Under Uncertainty-Real Options to The Rescue?, The Lngineering Economist, 47(2), 105-150   DOI   ScienceOn
20 Trigeorgis, L. (1999), Real Options: Managerial Flexibility and Strategy in Resource Allocation, The MIT Press, the 4th Printing, MA
21 Emery, D.R., Parr, P. c., Mokkelbost, P. B., Gandhi, D., and Saunders, A. (1978), An Investigation of Real Investment Decision Making with The Options Pricing Model, Journal of Business France & Accounting, 5(4), 363-369   DOI