A comparative study of real options valuation methods : economics-based approach vs. engineering-based approach

It has been expected that the option valuation theory will play a much more significant role in the real estate analysis. However, potentially because of the need for understanding the advanced financial theories, the real options analysis has not been fully used in the real world. In order to attack this problem, it is highly desired to create a more practical and easily understandable calculation model for valuing flexibility. With the increasing computational power of today, an interesting approach to valuing flexibility arises from the field of engineering systems. This approach does not require the understanding of advanced financial theories, and aims to assess the value of flexibility built into the project design. Although the perspective of this approach may be slightly different from that of traditional real options valuation approach, this approach might be an alternative method as a simpler model for valuing flexibility. The comparative study of the economics-based approach and the engineering-based approach revealed that the latter approach has one critical problem in estimating the value of flexibility; the usage of a single risk-adjusted discount rate leads to either underestimation or overestimation of the real options value. Based on the results of a case study, this thesis proposes to use the engineering-based approach together with the economics-based approach. With its ability of comprehensive analysis and graphic presentation, the engineering-based approach has a great probability to make it easier for average practitioners to intuitively understand the value of flexibility.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Urban Studies and Planning.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2007

Author dc:creator

• Masunaga, Shuichi, S.M. Massachusetts Institute of Technology

Advisor dc:contributor.advisor

• David Geltner.

• Urban Studies and Planning.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/42019

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/42019