Investment appraisal under uncertainty Essay Example | Topics and Well Written Essays - 1250 words

Investment appraisal under skepticism - Essay Example publications review Real option valuation c alls for an elaborate and a firm strategy to form a conceptual tool to make the decision for the company (Kim & Sanders 2002). The most appropriate tool to be utilize in incertitude cases is using real option as a technique to assess investments for contexts with proud market, technical and technological uncertainty (Billington, Johnson & Triantis 2002). This is because they allow managerial flexibility and option analogy. Real options ensure delaying make a rightfulness decision on investment of a company until a snip when the right information is obtained to make the best decision. Kim & Sanders (2002) notes that real option approach in this case takes into consideration ascertaining all important(predicate) sources of ambiguity and distinguishing, making, and fostering options whose take accounts comes from responding to new information about the uncertainties. Mun (2002) not es that real options atomic number 18 important in identifying taxonomy of the business. Real options are more important in growth options of the business since they are analogous to monetary call options. Longstaff & Schwartz (2001) notes that, real options involve a sequence of investment over a period that makes them favored than the other capital budgeting decisions. These real growth options thus compound options, where options are formed upon the exercise of earlier options. Moreover, real options are better used as techniques to assess investments for contexts with high market, technical and technological uncertainty since they allow companies to make decisions on contracting situations. This can have a significant impact on the value of the shareholder (Li & Johnson 2002). Value Drivers of Real Options Kim & Sanders (2002) notes that value created from the right and not the obligation to acquire or exchange a specific asset, has value even though not ad infinitum. Option value determined by several factors, both quantitative and qualitative. Understanding the above factors enables managers to make the appropriate decisions in order to exploit them. Uncertainty about the future Real options are determined by uncertainty about the future. This implies that if more possibilities of interacting with the uncertainties exist, then they will create value. This situation is created by asymmetric payoff body structure alongside discretionary rights. Time to expiration Real options are also determined by the metre to expiration. This situation implies that the more time an option takes to exercise the option, the more valuable the option will become. The ground behind this rationale is that the protracted time will work to increase uncertainty. However, in other cases, increases in uncertainty are often offset by increased in costs, which are triggered by the lengthy period (Li & Johnson 2002). Time value of gold Real options are also affected by the time value of money. This is an essential part since money affects all the sectors of the economy. Monetary policies by the government affect all sectors of the economy and have impacts on investment decisions, which concern undertaking or abandoning the project. Time value of money affects inflation, cost of capital, and macroeconomic stability, which in turn affects real options. The reason behind this is that the interest rate aerated by the central banks affects the time value of money, thus exposing real options to political risks. Qualitative factors Real options are