Real Options in Capital Investment: Models, Strategies, and Applications

By Lenos Trigeorgis | Go to book overview

NOTES
1.
See the U.S. Clean Air Act Amendments of 1990, Public Law number 101- 549, 104 Stat 2399 ( 1990).
2.
For an overview, see Tietenberg ( 1992).
3.
The argument is, of course, more complicated if the marginal benefits of pollution control are unequal across sources. For example, suppose some sources of a given pollutant were directly upwind from a residential community, and others downwind; suppose, also, that the local effects of the pollution on the health of nearby residents were important. Then, the allocation of the permits across sources would matter a great deal. This kind of problem, however, is held to be less serious for acid rain than for many other air pollution issues. Sulfur dioxide emissions can travel hundreds of miles before contributing to acid precipitation, so the precise location of sources matters less than, say, for acute airborne toxins or carcinogens.
4.
The total annual sulfur dioxide emissions from U.S. electric utility plants in the mid-1980s amounted to about 16 million tons. This figure is supposed to fall to roughly 12 million tons during Phase One, and to 9 million tons in Phase Two. See Reinhardt ( 1992, p. 10).
5.
The background for this case is in Reinhardt ( 1992).
6.
There are several deeper issues concerning the development of this discount rate, but they are beyond the focus of this chapter.
7.
For his theory of nonrenewable resources, see Solow ( 1974).
8.
In considering the problem from an options standpoint, convenience yield may become significant, but it should be zero if, as the traditional capital budgeting methodology essentially assumes, only expected values matter.
9.
See the U.S. Clean Air Act Amendments of 1990, section 416(c), 104 Stat 2627.
10.
The net present cost of the third alternative, switching fuels, is $168 million.
11.
See Rose et al. ( 1992, p. 84).
12.
See the reference section for some of this work.
13.
It derives, to a certain extent, from other uncertainties as well, such as changes in the relative prices of coal, and in interest rates and scrubber prices. These complicating factors are not directly addressed in this chapter.
14.
Here we ignore the important problem of time-to-build.
15.
Recall from the discussion of Figure 14.1 that the NPVs of the two alternatives are equal, or "crossover," at an allowance price of $323.
16.
This result is partly driven by the lack of time-to-build, since there is re-

-262-

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Real Options in Capital Investment: Models, Strategies, and Applications
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Tables and Figures ix
  • Preface xiii
  • Chapter 1 Real Options: An Overview 1
  • Introduction 1
  • Acknowledgments 28
  • Notes 28
  • Part I Real Options and Alternative Valuation Paradigms 29
  • Chapter 2 Methods for Evaluating Capital Investment Decisions Under Uncertainty 31
  • Introduction 31
  • Conclusion 44
  • Notes 45
  • Chapter 3 Merging Finance Theory and Decision Analysis 47
  • Introduction 47
  • Summary and Conclusion 65
  • Acknowledgments 66
  • Notes 66
  • Chapter 4 The Strategic Capital Budgeting Process: A Review of Theories and Practice 69
  • Introduction 69
  • Conclusions 84
  • Acknowledgments 86
  • Notes 86
  • Part II General Exchange or Switching Options and Options Interdependencies 87
  • Chapter 5 The Value of Flexibility: A General Model of Real Options 89
  • Introduction 89
  • Concluding Remarks 105
  • Acknowledgments 105
  • Notes 106
  • Chapter 6 The Valuation of American Exchange Options with Application to Real Options 109
  • Introduction 109
  • Conclusion 119
  • Acknowledgments 120
  • Notes 120
  • Chapter 7 Operating Flexibilities in Capital Budgeting: Substitutability and Complementarity in Real Options 121
  • Introduction 121
  • Conclusion 130
  • Acknowledgments 131
  • Notes 131
  • Part III Strategy, Infrastructure, and Foreign Investment Options 133
  • Chapter 8 The Value of Options in Strategic Acquisitions 135
  • Introduction 135
  • Implications and Conclusions 147
  • Acknowledgments 148
  • Notes 148
  • Chapter 9 Corporate Governance, Long-term Investment Orientation, and Real Options in Japan 151
  • Introduction 151
  • Implications and Conclusions 158
  • Notes 160
  • Chapter 10 Volatile Exchange Rates and the Multinational Firm: Entry, Exit, and Capacity Options 163
  • Introduction 163
  • Conclusions 178
  • Acknowledgments 180
  • Notes 180
  • Part IV Mean Reversion/ Alternative Formulations in Natural Resources, Shipping, and Start - Up Ventures 183
  • Chapter 11 The Effects of Reversion on Commodity Projects of Different Length 185
  • Introduction 185
  • Conclusions and Extensions 199
  • Appendix 201
  • Acknowledgments 204
  • Notes 204
  • Chapter 12 Contingent Claims Evaluation of Mean-Reverting Cash Flows in Shipping 207
  • Introduction 207
  • Conclusions 216
  • Appendix 217
  • Acknowledgments 218
  • Notes 218
  • Chapter 13 Valuing Start-Up Venture Growth Options 221
  • Introduction 221
  • Conclusion 236
  • Appendix 237
  • Acknowledgments 238
  • Notes 238
  • Part V Other Applications: Pollution Compliance, Land Development, Flexible Manufacturing, and Financial Default 241
  • Chapter 14 Investment in Pollution Compliance Options: The Case of Georgia Power 243
  • Introduction 243
  • Notes 262
  • Chapter 15 Optimal Land Development 265
  • Introduction 265
  • Conclusions and Extensions 277
  • Appendix 278
  • Acknowledgments 279
  • Notes 279
  • Chapter 16 Multiproduct Manufacturing with Stochastic Input Prices and Output Yield Uncertainty 281
  • Introduction 281
  • Conclusion 298
  • Appendix 300
  • Notes 301
  • Chapter 17 Default Risk in the Contingent Claims Model of Debt 303
  • Introduction 303
  • Conclusions and Extensions 317
  • Acknowledgments 318
  • Notes 319
  • Bibliography 323
  • Author Index 347
  • Subject Index 351
  • About the Editor and Contributors 357
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