Valuation of Real Options Under Uncertainty

Specialeforsvar ved Nikolaj Møller Lyngby Pedersen  og Nicolaj Schou Andersen

Titel:  Valuation of Real Options Under Uncertainty

Abstract: Real option analysis has been a field of interest in the last decades, but complexity has been an obstacle for practitioners. Optionalities embedded in real investment projects are essential, and ignoring those in the valuation of investments is inexpedient. Therefore, based on the case from the IT company KMD, we lay out different improvements for the valuation of investments. Real investment projects are often subject to multiple optiona-lities and throughout the thesis, we emphasize the importance of handling the compound-ded option framework under uncertainty appropriately. Different models are considered with varying complexity and setups. The conclusions are however universal. We find, that firms can enrich their valuation method substantially by applying real option analysis compared to a classical net present value method. Furthermore, we find a trade off between the expansion and abandonment options, since they are mutually exclusive. Additionally, the sooner the expansion option is accessible the more value it adds to the investment, thereby creating a trade off between the defer and expansion options as well.

Vejleder: Rolf Poulsen
Censor:   Cathrine Jacobsen, ATP