Title :
Simulation and optimization for real options valuation
Author :
Cobb, Barry R. ; Charnes, John M.
Author_Institution :
Sch. of Bus., Kansas Univ., Lawrence, KS, USA
Abstract :
Real options valuation (ROV) considers the managerial flexibility to make ongoing decisions regarding implementation of investment projects and deployment of real assets. This paper introduces a simulation-optimization approach to valuing real investment options based on a model containing several decision variables and realistic stochastic inputs. Using this approach, the value of a portfolio of real investment projects is determined by maximizing the mean discounted cash flows calculated by the model over many combinations of the decision variables. This yields an optimal decision rule that significantly increases the value extracted from the investment projects in comparison to arbitrary decision rules.
Keywords :
decision theory; digital simulation; financial data processing; investment; optimisation; stochastic processes; decision rules; decision variables; investment option valuing; investment projects; managerial flexibility; mean discounted cash flow maximization; optimal decision rule; portfolio value; real asset deployment; real options valuation; realistic stochastic inputs; simulation-optimization approach; Asset management; Cost accounting; Economic forecasting; Investments; Lattices; Portfolios; Pricing; Project management; Remotely operated vehicles; Stochastic processes;
Conference_Titel :
Simulation Conference, 2003. Proceedings of the 2003 Winter
Print_ISBN :
0-7803-8131-9
DOI :
10.1109/WSC.2003.1261442
