Journal of Applied Economic Research
ISSN 2712-7435
Method of Control of Efficiency of Investment Projects Based on Real Option Theory and Method of Analysis of Hierarchies
Baev L. A., Egorova O.V.
Abstract
The article is devoted to the development of a method for valuation and control of the efficiency of investment projects under conditions of high uncertainty. The limitations of the traditional valuation methods of the efficiency of investment projects are highlighted and a more relevant approach through the application of real option theory is proposed that allows for evaluating a project based on tis multivariance and the possibility of decision making at every stage of its development. The article shows that, despite the high relevance of the real options theory, its practical use is very difficult for a number of reasons. The main problem of estimating the value of real options is the need to use in the calculation a sufficient number of a priori statistics regarding the project, which is unfeasible. The authors propose a method in which the probabilistic characteristics of the model project are replaced with correct expert ratings. The method is referred to as the modified ROV – method (MROV). This method is based on the binomial model of assessing the value of real options by building a decision tree. At each node of the tree the project might develop in line with an "optimistic" or "pessimistic" forecast. Since the development of the project under any scenario depends on a number of criteria of the environment, the task of assessing the value of real options becomes a multicriteria one. One of the most sound and practically relevant methods of solving such problems is the method of analytic hierarchy process, which is the basis of the developed MROV method. The article also details the algorithm of implementing this method to determine quantitative estimates of the relative probabilities of the development of the project on "optimistic" or "pessimistic" scenarios in each node of the binomial tree. The resulting estimates subsequently used as weights in the calculation of the net present value of the optional investment project for a decision on the feasibility of its implementation and inclusion of the real options being evaluated in the project.
Keywords
Key words: investment; uncertainty; real options; management; efficiency; multicriteriality; the probability.
About Authors
DOI: http://dx.doi.org/10.15826/vestnik.2016.15.2.09
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