Venture
LECTURE 4 Investment under uncertainty, real options п‚· Derivatives valuation
approach. Example: п‚§ Copper mine п‚· Strategic options. Examples: п‚§ Copper
mine with shutdown option п‚§ Valuing Vacant Land п‚§ Valuation of an option to
delay п‚· Ratio comparison approach п‚· Additional Definitions ECOM051 Business
Finance, Lecture 4 (Dr Giles Spungin,
[email protected],
www.excalibur24.com, QMUL 2010 11) 1 Discounted cash flow methods ignore
opportunities (strategic options, indirect cash flows) created by investment project.
Strategic options exist whenever management has any flexibility regarding the
implementation of a project. Options to change the scale of a project (downsize,
expand), abandon it, or... Show more content on Helpwriting.net ...
Forward to buy 25k В Ј0 Cashflow at Y1 Cashflow at Y2 25k п ЂЁ p1 п Ђ
ВЈ0.10пЂ© 50k п ЂЁ p2 п ЂВЈ0.10пЂ© 25k п ЂЁ p1 п ЂВЈ0.65пЂ© ВЈ0 ВЈ0 50k
пЂЁ p2 п ЂВЈ0.60пЂ© ВЈ25k пЂЁ0.65 0.10п Ђ© ВЈ0 ВЈ0 ВЈ50k пЂЁ0.60
0.10пЂ© 25k п ЂЁ p1 п ЂВЈ0.10пЂ© 50k п ЂЁ p2 п ЂВЈ0.10пЂ© copper in Year 1
Forward to buy 50k В Ј0 copper in Year 2 with В Ј25k пЂЁ0.65 0.10п Ђ© 1+0.05
maturity in Year 1 Buy ZCB with face value В Ј25k(0.65 0.10) with В Ј50k пЂЁ0.60
0.10пЂ© пЂЁ1+0.06п Ђ©2 maturity in Year 2 Buy ZCB with face value В Ј50k(0.60
0.10) TOTAL В Ј35,345 ECOM051 Business Finance, Lecture 4 (Dr Giles Spungin,
[email protected], www.excalibur24.com, QMUL 2010 11) 7 Strategic
options DEFINITION: strategic options are opportunities that arise from
undertaking a project. These opportunities are usually missed in the direct cash
flow forecasts, as they are not easily identifiable. An option to delay the start of a
project, or a mine with shutdown option is examples of such strategic options. In
case of the latter, we employ a binomial tree approach. Copper mine with shutdown
option The mine will be closed down if the cost of extraction is greater than copper
price. EXAMPLE: Suppose that a copper mine will produce 75mln pounds of copper
one year from now if economic conditions ECOM051 Business Finance, Lecture 4
(Dr Giles Spungin,
[email protected], www.excalibur24.com,