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Full-Text Articles in Finance and Financial Management
Project Options Valuation With Net Present Value And Decision Tree Analysis, Bert De Reyck, Zeger Degraeve, Roger Vandenborre
Project Options Valuation With Net Present Value And Decision Tree Analysis, Bert De Reyck, Zeger Degraeve, Roger Vandenborre
Research Collection Lee Kong Chian School Of Business
Real options analysis (ROA) has been developed to correctly value projects with inherent flexibility, including the possibility to abandon, defer, expand, contract or switch to a different project. ROA allows computing the correct discount rate using the replicating portfolio technique or risk-neutral probability method. We propose an alternative approach for valuing Real Options based on the certainty-equivalent version of the net present value formula, which eliminates the need to identify market-priced twin securities. In addition, our approach can be extended to the case of multinomial trees, a useful tool for modeling uncertainty in projects. We introduce within decision tree analysis …
On ‘‘Investment Decisions In The Theory Of Finance: Some Antinomies And Inconsistencies’’, Bert De Reyck
On ‘‘Investment Decisions In The Theory Of Finance: Some Antinomies And Inconsistencies’’, Bert De Reyck
Research Collection Lee Kong Chian School Of Business
In the paper “Investment Decisions in the Theory of Finance: Some antinomies and inconsistencies”, Magni [Eur. J. Operat. Res. 137 (2002) 206] shows that using the net present value rule for making investment decisions can lead to inconsistencies and antinomies. The author claims that the so-called equivalent-risk tenet of finance, whereby an investor needs to compare an investment opportunity with an asset of equivalent risk, is impossible to implement. In this paper, we show that the main thesis of this paper is incorrect, and that finance theory, when applied correctly, can be used to value investment projects by comparing assets …