Real options analysis of investment decisions under the enterprise networks _ Papers

Paper Net: Abstract: Inspired by the financial options, financial options have been proposed with this virtual assets corresponding to the concept - real options, start thinking and methods used in the options market, financial options other than physical assets Investment and management, so that companies can make in an uncertain Economic environment, Investment decisions, traditional methods can not be who won the strategic value of this paper that the real options for future Investment decisions in key business management tools.

Keywords: uncertainty real options Investment decision-making of real options (Real Option is a financial option theory to options on real assets an extension of the underlying asset can be an option for non-financial assets as real options. Real options in capital-intensive industries, especially the prevalence of , an active supporter of real options include the famous large enterprises HP - Compaq (Hp-compaq, Boeing (BoEing, American Telephone and Telegraph Company (AT & T and other Fortune 500 companies, and enterprises in different industries to be used, not only because the real option to allow decision makers access to new information, then select the most attractive alternative Investment projects, and increase the presence of real options value of Investment opportunities, especially in an uncertain environment, this value may be is very large, so companies want to make the right Investment decisions in the decision-making, we must consider and include the value of these real options.

First, the concept of real options, the core ideas and meaning (a concept of practical options, "real options" is originally from the MIT Sloan School of Management, Stewart Myers (Stewart Myers, 1984 Professor, who first pointed out that the option analysis the company's growth opportunities and reasonable valuation is important, many of the company's physical assets can be seen as a call option the option value attached to the profits of this growing commercial business, such as Myers discussed, because in the future Some items may have the opportunity to exceed the competitive rate of return, the company's value could exceed the current market value of the project belongs to the traditional decision-making for such capital project evaluation criteria used method is the discounted value of expected completion date for the current net present value, so this approach implies an assumption: if investors decide to invest we must always adhere to the Investment until the end of the project. This standard approach ignores changes in the conditions before the date of completion of the case, the management is no longer promote the project option value, and because financial officer of Investment projects of future profits can be made inaccurate estimates, so take into account this constraint conditions, taking into account relevant management options becomes more important. Myers also pointed out that the company's capital structure will be extremely important to choose the value of these projects affect the traditional capital budgeting methods do not consider the project management option, not taking into account the company's capital structure flexibility and management options, however, the same financial flexibility financial options can also be used to measure the value of the company's capital structure choice through access to financial option for a considerable uncertainties include long-term Investment projects, financial flexibility and operational flexibility is quite the interaction between obvious Myers stressed that real option is to analyze how future decision-making can increase the value of a method or research in the future, this flexibility can move the camera and how much the value of a method in the relevant literature, and in-kind options similar to the concept of "management options", "Investment under uncertainty" concepts such as James (James C. Van Horne, 1998, gives the definition of management options are: management options is the so-called management to make further decisions to influence a project's expected cash flows, or future life of the project whether to accept the flexibility Dixit (Avinash K. Dixit peace Dick (Robert Pindyck1994 was made "under conditions of uncertainty of investment" concept, in detail under conditions of uncertainty discussed in the basic theory of irreversible investment, emphasizing the investment opportunities in the characteristics similar to options, according to analysis of how financial markets from the option pricing method developed to obtain optimal investment rules, described the enterprise in the provision of degree of flexibility to meet future conditions between different types of investment choices and other issues. Dixit peace Dick also pointed out that "the opportunity to get real assets are often called" real options. "Thus," management options "," in investment under uncertainty, "these concepts is the" investment in the real options approach. "
(B) The core idea of ​​real options real options and options not only the core idea of ​​the basic characteristics of each other, and with the physical characteristics of the investment decision-making (1 physical characteristics of investment decisions. Dixit peace Dick stressed: most of the investment There are three important features of decision-making, the interaction between these three characteristics determine the investor's optimal decision and this interaction is the core of real options. One can not be revoked or irreversible. at least the initial cost of investment part is sinking: if you change your mind, or business can not operate successfully, we can not completely recover the initial investment costs, such as drilling for oil, when drilling an oil well, if oil production is less than the expected yield, or oil down, then it can not collect the funds invested. As another example, a corporate marketing and advertising on the majority of investments are not recovered. Second, the uncertainty of return on investing in the future. uncertainty arising primarily from the incomplete information resistance in before making investment decisions, can not obtain needed information for the required experimental or test most items can only invest in proven and Investment of this uncertainty and real options are closely related Generally speaking, the greater the uncertainty of investment, the greater the value of real options. Third, the manager of the investment opportunity is a choice. Most of the investments or investment opportunities to choose not to invest now or never invest in two option, investors have a certain time in the investment choices, investors can postpone action to get more information about the future, such as an oil production uncertain field, and only gradually investment strategy, playing some of the wells , test the output of such acts slowly to reduce this uncertainty, so investors will gradually provide some valuable information, reducing uncertainty and correct differences in the expected value if the actual value on the positive side of uncertainty , it would continue to invest, if the uncertainty about the negative side, it would stop investing. Generally speaking, the higher the investor the freedom of choice, the greater the value of investment options (2 call options with similar financial Intuitively, one irreversible investment opportunity is very similar to financial call options in the financial category, a typical call option gives its holder the right way: in a specific time frame to pay the price for a certain value assets, such as buying 100 shares of common stock options, if the stock market price is higher than the exercise price, to within an agreed period in accordance with contract provisions "strike price" to buy the stock, by exercising the option to earn stock market prices and the difference between the exercise price, on the contrary, if the stock market price is lower than in the final price, the option holder will not exercise the option, when options are worthless, the loss of no more than the original purchase price of the option can be used as model representation: C = MAX (SK, 0. where: C that the value of call option, S is the stock price due date, K said that the exercise price. for an investment, assuming it is completely reversible, then the appropriate items The value is only the profit or loss it produces the expected present value stream, according to the potential uncertainty point of view, this investment decision is only to pay sunk costs in decision-making, the return is to obtain an asset value will fluctuate, which actually period with the right financial call similar to pre-purchase a set exercise price fluctuations in the value of the assets, rights, not obligations. have similar investment opportunities, the future holds now spending money or spending money to get the value of certain assets right to choose. execute this option is irreversible, although such assets could be sold to other investors, but it can not recover their options or the implementation of the funds paid by the option. The value of this investment, in part because by investing the future value of assets acquired is uncertain. If the value of the assets to rise, the net return from investment is also rising, if the assets decline in value, companies will not invest, but only the loss of the start of the project's initial investment. Therefore, real options and financial options, as has a similar feature, or to win the rewards outweigh the risks, the amount of potential loss amount, or you can choose to stop exercising the option to control losses.

(Three real options in investment decision-making in the sense of the real options theory and methods used for business investment decisions, is of great significance (1 can better deal with uncertainty. The traditional NPV method making business investment decisions assessment is the implicit assumption: the future earnings to measure cash flow is predictable, is determined if there is uncertainty reduces the value of this investment, therefore, the greater the uncertainty, the value of investments smaller, but we are in an uncertain external environment: we can not determine the time the sub-prime crisis, continued long, not 10 years after the oil to determine the price of gold is. some of the original investment is expected to be successful project has failed, and some would seem little hope of a new product has gained unexpected success Wharton Dowling (Don Doering and send Riel (Roch Parayre provide a set of survey data show that: the market penetration of existing technologies into existing success probability is 0.75; if a market or technology is new to the company, the probability of success dropped to 0.25-0.45, if the company to rely on new technology into new markets, the success rate was 0.05-0.15. it was found that the most valuable opportunities are often accompanied by a lot of uncertainty. real options approach breaks through the traditional method of dealing with uncertainty, that investment irreversibility, uncertainty and the timing of the interaction between each dealing with uncertainty, rather than deal of uncertainty as a theoretical hypothesis. The introduction of the concept of real options will completely change the attitude of investors towards risk. the greater the uncertainty, the use of options, the greater the chance, so the greater the value of the option, therefore, the real options are better able to deal with uncertainty, better explain the investment behavior of Economic agents, ie investors in a project decisions, not just calculate the net present value projects, but also implicit in the calculation of the value of real options projects (2 to establish the company's investment strategy analysis and the link between investment in the use of real options in investment decision-making is to identify when the first and the estimated investment in strategic options, and then re-designed investment program, to make better use has the option, and finally through the creation of options, prior to actively manage investments in real options Applications can study some of the following problem, what kind of company investment opportunities to create value is unique. to create this value, the company must bear much and what type of risk? what kind of risk can be spread? expected losses to the enterprise and how the impact of the implementation of corporate strategy? real options approach provides a framework for analysis to address these issues in the framework, we can analyze the investment investment analysis and business strategy to link together the company's net risk management the same time, physical options, Application of the method allows managers to more profound understanding of project uncertainty can affect the investment value of the project, and how to help companies gain additional strategic value (3 results of traditional methods of investment decisions were once again carefully test The traditional investment decision-making methods such as: net present value method (NPV is an important point is the result assuming a single fixed decision-making routes and the development of all initial decisions can not be changed in the future and development, and real options decision rule to multi-line as in selecting the optimal management of strategic uncertainty and the flexibility to link the results of, or in the development process of new information can be used when options. That is, when there is uncertainty in the future, the management the flexibility to correct strategy in the middle, with the traditional investment decision-making methods, real options analysis provides additional insight than the traditional, conventional methods of calculating the net present value investment decision is negative, the investment program should be abandoned, but may in the future there is a big strategic investment value, the use of real options on the net present value method and other traditional methods of investment decision-making once again the results of a careful test. Links to free download http://www.hi138. com 2 ﹑ real options in investment decision-making in the Application (a classification of corporate real options when making investment decisions, when external conditions change, companies often need to make changes to investment plans, investment projects have to give up, abandon the purchase of investment projects right investment decisions. the traditional investment decision-making theory, such as net present value analysis, decision tree analysis and simulation analysis that: either to invest here and now, or forever give up the investment, while the use of real options theory, managers can rely on the uncertainty of future events and development or to make some decisions, and not necessarily the traditional investment must be immediately and permanently give up the two investment options, or investors may lose some good investment opportunities. and traditional investment decision-making methods does not take into account the manager's active decision-making, External and internal information about investment projects and project technology changing some of the uncertainty, according to the characteristics of real options, real options can be roughly divided into the following six: Delay Option (Defer Option ﹑ expansion options (Change Scale Option ﹑ contraction options (Contract Option, abandonment option (Abandon Option, the conversion option (Switch Option, growth option (Growth Option.

(B delay option used in real life, tend to delay investment decisions is the cost of such as choose to wait for more information as to abandon the project in the profits that may arise during the waiting, competitors may use this time delay the development of competition of products, new competitors enter the market. wait for decisions related to flexibility of the trade-off between benefits and costs, if we have a franchise and opened a store signing a contract, contract, or set up right now or wait a year after opening, if these two options do not accept, will lose the opportunity to open stores. So, whether now or a year after we opened, will cost $ 5.25 million if the open right now, is expected in the first year will produce 50 million free cash flow, assuming the expected cash flow will grow at a rate of 2% per year with the cost of capital investment to adapt to 10%, the project can be sustainable if the investment is now estimated project value of = 625 million so that the net present value to achieve an immediate investment of 100 million, which means that sub-contract a minimum value of 100 million, but if we consider the one-year delay after the flexibility of investments , When should I invest? If you choose to wait, then after one year from now, either choose to invest 5.25 million yuan, or loss of investment opportunities and found nothing. then, the decision is relatively easy: if based on Economic conditions, customer tastes and trends trends in new information, opened a store of value more than 5.25 million yuan, then there is no doubt that will choose to invest, but if the trend of the industry changes very fast, on expectations of cash flow and how much is the value chain there is a big no certainty. can delay investment as a chain of the underlying asset, exercise price is 525 million one-year European call option, assuming risk-free interest rate of 7 percent through the company's publicly traded comparable rate of return volatility to estimate the fluctuations in the value chain is assumed volatility of 35%. Also, if you choose to wait, you will immediately lose their investment if the gain of the first year free cash flow of $ 500,000. This cash flow to pay the equivalent of stock dividends, European call option holders will not receive dividends before exercising the option, assuming that the only cost is the cost of deferred investment. Application Black - Coles model of the delay period of investment in European call option valuation First calculate the current value of the asset without dividends: S *= S-PV (DIV = 525-50/1.1 = 579.55 (million, followed by calculation of the cost of investment one year after the present value of the cash flow is determined, risk-free interest rate discount: PV (K = 525/1.07 = 490.65 (million, and then calculate d1 and more than today will receive an immediate investment of $ 1 million net present value, therefore, the best delay investment, if invested today then, means giving up the "Exit" option and only the net present value in today's investment options than the value of waiting, will choose to invest today, and if the value of investment in the future with great uncertainty, the option to wait the more valuable. wait the higher the cost, the appeal will delay the smaller the investment options.

(Three other Applications of real options in addition to the delay option, there are practical options: (1 options to expand the project to the holder the right time in the future to increase the size of the investment project, that the next time, if the investment results Investors are entitled to a good investment for the expansion of the scale, such as: Investors in the investment chain, the market conditions become better (product prices or lower costs, etc.) then the investor through the expansion of the scale of investment projects can be achieved better than initially expected return on investment. the company in terms of expansion options, enabling the company to use some of the future growth opportunities, the expansion options of strategic importance (2 cut investment options. cut investment and the expansion of rights is the right investment corresponding to the real options that the holder the right project in the next period of time to reduce the size of the investment project, that the next time, if the investment results are not satisfactory, then the investor the right to shrink the scale of investment, such as: investors in the investment chain, the deterioration in market conditions (product costs or lower prices, then investors may by shrinking the size of investment projects and reduce the investment risk (3 abandonment option. abandonment option is to leave the project options. abandonment option can increase the value of investment projects, if the project proceeds are insufficient to cover the cost of inputs or market conditions deteriorate, then the investor the right to abandon the project continue to invest, for example: we can develop a product made from investors to push the product investment to the market is divided into several stages, if market conditions deteriorate, then the investor the right to abandon the project continue to invest, continue to invest in order to control potential losses. Most of these types of options exist in the R & D-intensive industries, these items have high degree of uncertainty, and long development period (4 conversion option in a future time, the project holder the right to convert between a variety of decision-making, and the corresponding conversion option implies the initial design of the project among the flexible production facilities allow the production line to convert easily between products, the conversion option will become part of the cost of equipment, such as: governance investors engaged in oil refining project design, may be designed to use a variety of energy such as: electricity, oil and gas, petroleum refining equipment, these types of investors in energy prices, according to the changes, choose the right energy to reduce costs (5) growth options. growth option can provide future Some investment opportunities.'s future investment opportunities can be viewed as a potential investment projects in kind collection calls. imaginary than real call option call option at greater risk, and because most of the growth option value is likely in a virtual state Therefore, the growth of enterprise value in some of the risks, is likely to operate than the company's assets are at greater risk, such as: investment in the first generation of high-tech products, though the net present value is negative, but in the first-generation product development process infrastructure, experience and potential resources is to develop the next generation of high-quality products based on If the company makes the initial investment, it is impossible to obtain the next product or other investment opportunities because of growth options, which makes today investment feasible. enterprises in investment can be the first small-scale implementation of the project, while maintaining future growth options, rather than on the initial investment in the project, if proven feasible, and then execute on growth options.

In practice, market, investment environment faced by the existence of a wide range of uncertainty and competitive, the project's cash flow is not as investors predicted, is in stone. Over time When investors get new information, some uncertainty related to the project will gradually be resolved. Decisions on investment projects, investors will face a variety of options, rather than under the traditional analysis simply accept or reject the project investment, and real options model should be applied to business investment decisions, even in a single project for the needs of multi-stage investment projects, the implementation of the investment decision-making process, decision makers need to take different combinations of real options.


References:
[1] Jonathan Mans: <<real options analysis>>, China Renmin University Press, 2004.

[2] Yu Hongliang: <<financial options and real options - comparison and applications>> Shanghai Finance University Press, 2003 edition.

[3] Yang Chunpeng: <<real options and its applications>> Fudan University Press, 2003.

[4] George wear, etc., Ying Shi translation: "Wharton on managing emerging technologies>>, China Press, 2002.

[5] James Van Horn, etc., Guo Hao, etc. Translation: <<Modern Enterprise Financial Management>> Economic Science Press, 1998.

[6] Myers S.. Finance Theory and Financial Stratery. Interfaces, 1984.

[7] Dixit A. and R. Pindyck. Investment under Uncertainty, Princeton University Press, 1994.

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