Real options - PI

This is my assignment for Derivative module, have a look and it is useful for future finance advisors

PART I: INTRO

Project appraisals include a range of techniques used to value projects. They help managers to make a good final decision in choosing the best project(s) (dependent on mutual projects or independent projects) based on the available or estimated financial data. For the financial assets, Net Present value (NPV) is considered as the best technique among others such as; Cash back period, Average Rate of Return and Internal Rate of Return. It has been proven that NPV gives an adequate formulation satisfying all the four investment rules (Copeland et al, 2005). Nevertheless, there appear some difficulties in using the traditional technique – the NPV in valuing the real assets, for example; “land, buildings, plant, and equipment” (Hull, 2012, p.765). These real assets normally go alongside with the options to expand, extend, abandon… on the projects. The NPV technique could not properly evaluate those options with an appropriate discount rate (Hull, 2012). In recent years, Real Options has become the standard method. This approach is believed to overcome the problems that the traditional technique cannot solve. In the time being, this paper will attempt to present the concepts behind the real options. Then, by applying the real options application in the nuclear power development project in Vietnam, this essay also takes a look in how important the real options is in evaluating the investment opportunities and making decision.