Section 3 reviews the reasons for this view and outlines and discusses several ROA methodologies. This is somewhat surprising as ROA should not be viewed as a revolutionary approach but evolutionary as it extends traditional DCF analysis. Real options are embedded in most projects but there has been a certain hesitation by management to forego their traditional DCF “comfort zone”. Various applications of real options in the maritime industry are used to illustrate the scope and applicability of an option approach. In this current period of heightened business uncertainty ROA offers managers a very useful and an appropriate approach to evaluate investments and formulate strategy.Ī discussion of the key issues of valuing investment in an uncertain world follows in Section 2 with real options analysis, ROA, offered as an alternate paradigm as it allows managers the ability to alter/adapt the project in light of new information. The real option method enables decision-makers to leverage uncertainty and limit downside risk. Real options helps managers formulate their strategic options (Amram and Kulatilaka, 2000) enabling investment strategy to be crafted as a series of options that are continually being exercised to achieve both short and long term returns on investment (Yeo and Qui, 2003). If used as a conceptual tool, it allows management to characterise rather than calculate and communicate the strategic value of an investment project. Others (Triantis and Borison, 2001 amongst many) suggest that it is the process and discipline of framing an investment decision in real options terms that provides the greatest benefit. It is indeed true that most mainstream academic finance texts now include real option analysis as a tool for investment evaluation but perhaps we are still a little distance off from the analysis achieving “standard” investment evaluation status. 1 Their intuitive appeal led Copeland and Antikarov (2001), to predict that by the end of the first decade of the second millennium AD that real option analysis, ROA, would become the standard valuation metric. The first recorded real options deal being that of the philosopher and mathematician, Thales of Miletus (circa 624BC–536 BC) who made a fortune by taking an option on renting olive presses in Miletus and Chios in Asia Minor at a set price and the crop turned out to be bountiful. The basic principles underlying real options are intuitively appealing and readily understood by management, having been used for millennia. Real option analysis (ROA), an extension of discounted cash flow (DCF), has at its core the calculation of shareholder value and thus is a very powerful metric to value maritime investments. Valuing Maritime Investments with Real Options: The Right Course to Chart
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