The Project Valuation with Abandonment and Reset Investment Proportion Applying Real Option Method

Yi-Long Hsiao¹, Li-Ling Chen²

¹Department of Finance, National Cheng Kung University, Tainan City.
²Department of Food and Beverage Management, Tatung Institute of Technology, Chiayi City.

DOI: 10.4236/jmf.2014.45028                

Abstract

We discuss the valuation of investment project in a firm applying a real option method with abandonment and reset investment proportion. We take the depreciation value of the facilities and the research and development (R & D) fee into consideration. Our contribution is to derive a pricing model of two-stage optimal decisions allowing abandonment and reset investment proposition. Different from the net present value (NPV) or discount cash flow (DCF), the real option method can efficiently catch the uncertainty in the market, and it can help managers to make the optimal policy for the project. We can improve our method for a multi-stage decision model or a continuous decision model in the further researches.

Keywords

Real Option, Project Valuation, Two-Stage Decision

Conflicts of Interest

The authors declare no conflicts of interest.

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