Real Option Valuation Valuing the strategic options embedded in your business project proposal
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Real Option Valuation Description

Real Option Valuation is an Excel template that offers you the possibility to perform financial analysis for various financial scenarios. Traditional discounted cash flow investment analysis will only accept an investment if the returns on the project exceed the hurdle cost of capital rate. This is a worthwhile exercise as input for valuing real options; however it ignores any strategic options that are commonly associated with many investment decisions. Real option valuation provides the ability to identify what options might exist in a business proposal and the tools to estimate the quantification of them. The real option valuation template combines ease and flexibility of input with embedded help prompts to assist with selecting the correct option valuation model for the investment decision. Modified Black Scholes option pricing models are provided to value the options to delay, expand or abandon proposed of existing business streams or investments. An unlimited branch binomial tree builder model can be employed to evaluate complex strategic options with multiple stages. The Nash equilibrium Game Theory option model evaluates market entry strategies in a competitive environment with clear results on whether to lead, follow or enter the market simultaneously with competitors. Main features: Input flow is assisted with information on each Real Options Valuation theory and detailed explanations for ease of interpretation. The 'Quick Start' menu provides information for choosing the correct Real Options Valuation tool for the investment decision and associated opportunity to be analyzed and quantified. The modified Black Scholes option pricing model is available to value the options to delay, expand, or abandon investment projects. Modifications to the traditional Black Scholes model include the accounting of dividends or cash flows from the underlying asset and the ability to exercise the option before the time in which the opportunity is expected to expire. The Binomial tree option valuation model allows the creation of unlimited binomial option branches to evaluate complex strategic options with multiple critical decision stages. New binomial branch values flow back through the entire to the starting node. The Game Theory model based on the Nash equilibrium theory is provided to determine the optimal strategy as a leader, follower or entering the market simultaneously in a competitive environment. Game theory analysis is suitable for evaluating market entry timing for new products or businesses. Categorized investment and/or industry risk profiles are provided and can be modified to utilize across Real Options Valuation models as a proxy for risk assumptions. Applying standardized risk assumptions across multiple option valuations not only accelerates the analytical process but also provides a common benchmark for comparing business strategies.

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