Project Investment Decision-making Methods Research Based On Real Options

With the rapid technology innovations and severe competitions, business enterprises are facing more and more uncertainties. Consequently, investment projects have to bear more risk. How to control risks and assess correctly the value of investment projects has become an increasingly important topic in the contemporary corporate investment decisions. Traditional methods of investment appraisal is only from a static point of view of investment risks are often overlooked in the whole process managers flexibility, such as abandonment, conversion, expansion of investment and therefore they could not accurately assess the value of investment projects, resulting in investment decisions mistakes. Options thought introduced into the investment decision-making areas and the investment choice right to exist as a form of options lead to form a concept-real options. Use of real options view of investment can be a better understanding for uncertainties, risks, and benefits. Real options theory will view a variety of investment opportunities and management of flexible as options and make a quantitative analysis, which give full consideration to all kinds of flexibility values in investment activities. Real options theory is an important innovation of investment decision-making theory and method.In this dissertation, we divide investment decision-making into single-project and project portfolio investment decision-making based on real option theory. Both from the perspective of the project investment decision-making methods have been studied. The main jobs have been done as following:(1) A novel fuzzy real option pricing method has been presented. Through using fuzzy set theory, the use of normal fuzzy number is expected to express the present value of cash flow, and we make use of lattice closeness degree to construct weighted vectors. At last, we construct a new type of real option pricing method. This method considers the fact that many data cannot be accurately quantified when investors make investment decision in fuzzy environment. Using fuzzy set theory can improve the practical application value of investment decision-making method. In additional, we found it is logical to use a normal fuzzy number to predict the present value of expected payoff. So this new type of fuzzy real options approach can provide a theoretical basis for single-project investment decision-making.(2) A project investment decision-making method has been proposed based on American real options owing to the timing characteristic of most of projects. In this dissertation, we construct a variable grid finite difference method about the parabolic equation free boundary value problem of American option pricing model. This method has two advantages:first, the computation can be reduced because of solution region limited in the free boundary; second, the option value and the best exercise boundary can be got together. Therefore, it provides a theoretical solution for real options included in project investment. At the same time, this method can also determine the optimal investment time for investors whether or not to conduct the project investment decision-making. Theory and experiment showed that the method is efficient and accurate. In addition, this paper displays visually actual project investment decision-making process, which can provide theory and practice guidance for enterprise project investment decision-making.(3) Due to efficience, strategic and real-time of project portfolio selection, we set up a projects portfolio selection decision-making system based on real options theory. In this decision-making system, we screen chosen projects according to corporate strategy, which can narrow the set of alternative projects and improve efficiencies of project portfolio selection and computing. In additional, we define a fuzzy evaluation function through a combination of fuzzy real option theory and fuzzy net present value method. The use of the evaluation function, we can sort projects and get the optimal investment time of each project, and can eventually be bound to meet the entire given portfolio. In particular, in the decision-making system, we propose a real-time correction process to update the project portfolio, which will be the implementation of a dynamic project portfolio management.(4) To consider the resource-constrained and resources scheduled reasonably can make project portfolio play a most effective. Based on this opinion, we construct an R&D projects portfolio selection model concerning resource scheduling. The model use fuzzy set theory and constrained scheduling method from many projects to meet the selection of a group of costs, resources and time constraints and make enterprise earning a better benefit. Because it takes into account the resource-scheduling problem, in particular, we make a abstract expression about resource scheduling in the model, which makes enterprise decision makers schedule the resources as human resources, technical resources, financial resources or material resources and so on in specific applications. Finally enterprises will get an optimal scheduling model fitting its actual situation.(5) We proposed an R&D project portfolio selection model under uncertainty conditions concerning project interactions. The practicality of project portfolio selection methods is an issue in the project portfolio selection theory study. It is also aimed at this point to discuss how this article from the perspective of corporate strategy selection of alternative projects, the use of fuzzy set theory to deal with the related uncertainty information, the objective function by adding items of real options to reflect the value from project management flexibility, through combining qualitative and quantitative method to set up a R&D project portfolio selection model concerning projects interactions-benefits, technologies, and resources.In short, this dissertation has studied project investment decision-making methods based on real options for single-project and project portfolio investment issues. Theoretical analysis shows that these decision-making methods can effectively provide guarantees for the project investment decision-making. In final, examples of simulation experiment prove the decision-making methods are effective.