The Application Of Real Options Theory In Capital Budgeting

The development of the new technologies and the process of the globalization increase the uncertainties of the economics. The traditional capital budgeting methods, among which the NPV method is the most representative, share the same defects. They are based on the hypothesis that all the investments are reversible, and all of them ignore the fact that efforts of the project managers will change the project value directly. The chances that such defects bring about the wrong vision of the project value for the project managers is not neglectable in the uncertain environment. To amend these defects, a new trend that deploying the real options theory in the capital budgeting process has sprang up recently.The dissertation reviews most of the worldwide remarkable papers about the application of the real options theory in the investment of the corporations. Though the researches are very prosperous in this field, especially in the western countries, and there are so many different aspects to be studied, some problems as below remain unresolved:A. Most papers focus on the pricing of one kind of real option each time. In this case the interactions of different real options are unpresented;B. Most researchers, especially the domestic scholars, prefer to choosing the Geometric Brownian motion as the only basic model to describe the variation of the value of the basic asset;C. Very few papers have discussed the application of the real options theory in the best decision making of the investment of the corporations. Most of them concentrate on the project evaluations or the capital budgeting which is once for all;To solve these problems is the main task of this paper. The dissertation studies different kinds of traditional capital budgeting methods, which represent different stage of the development of capital budgeting. By this means, a map of the process of development of capital budgeting comes to our face. In the meantime, based on the principle of arbitrage-free pricing theory, the paper develops a mathematical model by using dynamic programming approach. Cases are also included in the analyzing process. The main results are as the following:1. The essence of real options is pointed out. The traditional capital budgeting method based on NPV ignore such facts that most of the investments are irreversible and almost every project manager is preparing to make some adjustments to get the best...