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Investment appraisal under uncertainty - Essay Example

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Investment Appraisal under Uncertainty 4th December 2012 Capital budgeting decisions Real option valuation Real option valuation is a form of capital budgeting techniques that applies option valuation technique to value the future worth of an investment portfolio…

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Investment appraisal under uncertainty

Literature review Real option valuation calls 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 used in uncertainty cases is using real option as a technique to assess investments for contexts with high market, technical and technological uncertainty (Billington, Johnson & Triantis 2002). This is because they allow managerial flexibility and option analogy. Real options ensure delaying making a right decision on investment of a company until a time 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 important sources of ambiguity and distinguishing, making, and fostering options whose values comes from responding to new information about the uncertainties. Mun (2002) notes that real options are important in identifying taxonomy of the business. Real options are more important in growth options of the business since they are analogous to financial call options. Longstaff & Schwartz (2001) notes that, real options involve a sequence of investment over a period that makes them preferable than the other capital budgeting decisions. These real growth options thus compound options, where options are formed upon the exercise of previous options. ...
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