Real Options and Project Evaluation
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World Bank, Washington, DC
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In this paper authors present a
preliminary approach to the evaluation of policies and
projects based on current thinking on cost benefit analysis
and real option methodology and the authors' recent
work on the same subject. Authors start from the assumption
that economic agents undertake investment projects in order
to create and exploit opportunities for increasing profits,
growth, wealth and, ultimately, their welfare. These
opportunities are options, rights and not obligations to
take some action in the future. They include not only
projects undertaken, but also projects that could be adopted
in the future and opportunities that can be further created
or destroyed by this adoption. From the point of view of the
welfare of an entire economy, opportunities enlarge the set
of actions that may contribute to national wealth. Not only
is this increased by the net flow of discounted benefits
generated by new ventures, but also by the net value of the
options created and destroyed by investment behavior. When
companies develop investment opportunities, therefore, they
contribute to national welfare in a more subtle, but not
less important way, than when they are actively set to
exploit some of these opportunities. By recognizing the
direct contribution to country wealth of project design and
planning, option theory may thus substantially change the
theory and practice of decision making about capital investment.
Palabras clave
SOCIAL, ACCOUNTING, APPROACH, ARBITRAGE, ASSET VALUE, AVAILABILITY, BALANCE, BANK POLICY, BENCHMARKING, BUDGETING, CALL OPTION, CALORIFIC VALUE, CAPITAL FORMATION, CAPITAL INVESTMENT, CAPITAL STRUCTURE, CASH FLOW, CD, COAL, COLLECTIVE ACTION, COMMODITIES, COMPARATIVE ADVANTAGE, COMPENSATION FUND, COMPETITIVE MARKET, CONSUMERS, CONTINGENT VALUATION, CORPORATE FINANCE, CORPORATE INVESTMENT, COST ANALYSIS, COST BENEFIT ANALYSIS, COST EFFECTIVENESS, COST OF CAPITAL, CRUDE OIL, DAMAGES, DECISION MAKING, DECISION TREE, DEVELOPING COUNTRY, DEVELOPMENT STRATEGY, DIESEL, DISCOUNT RATE, DIVIDENDS, DRILLING, ECONOMIC ANALYSIS, ECONOMIC DYNAMICS, ECONOMIC POLICIES, ECONOMIC VALUE, ECONOMIC WELFARE, ELECTRONIC BANKING, EMPIRICAL ANALYSIS, ENERGY GENERATION, ENVIRONMENTAL, ENVIRONMENTAL RISK, EQUILIBRIUM, EQUIPMENT, EXPECTED VALUE, EXPECTED VALUES, EXPENDITURE, EXPORTER, EXTERNAL FUNDING, FINANCIAL MARKETS, FIXED COSTS, FIXED EXCHANGE RATE, FOOD POLICIES, FORECASTS, FOREIGN INVESTMENT, FOREIGN INVESTORS, FUEL, FUEL COST, FUEL OIL, FUTURES, GAS PLANTS, GAS TURBINE, GROSS DOMESTIC PRODUCT, GROWTH POTENTIAL, HEAT, HEAT RATE, HEAT RECOVERY, HEAVY FUEL OIL, HOLDING, HUMAN RESOURCES, INFORMATION TECHNOLOGY, INFRASTRUCTURE DEVELOPMENT, INFRASTRUCTURE INVESTMENTS, INSURANCE, INTANGIBLE, INTANGIBLE ASSETS, INTEREST RATE, INTERNATIONAL MARKET, INVESTING, INVESTMENT BEHAVIOR, INVESTMENT CHOICES, INVESTMENT DECISION, INVESTMENT OPPORTUNITIES, INVESTMENT PROCESS, INVESTMENT PROJECTS, INVESTMENT SPENDING, IRREVERSIBILITY, JUDICIAL SYSTEM, LAND USE, LIABILITY, LIABILITY MANAGEMENT, LOAN, LOSS OF REVENUES, MARKET CONDITION, MARKET ECONOMY, MARKET PRICES, MARKET RISK, MARKET SHARE, MARKET SIZE, MATURITY, MOBILE PHONES, MULTIPLIERS, NATURAL GAS, NATURAL RESOURCES, NET VALUE, NPV, OIL, OIL EXPLORATION, OIL FIELD, OIL PRICE, OIL PRICES, OIL RESERVE, OIL SECTOR, OPPORTUNITY COST, OPTION VALUE, OWNERSHIP STRUCTURE, PETROLEUM, PIPELINE, POLICY MAKERS, POWER, POWER PLANT, PRESENT VALUE, PRICE CHANGES, PRIVATE INVESTMENT, PRODUCTION COSTS, PUBLIC GOOD, PUBLIC SPENDING, PUT OPTION, RATE OF RETURN, RECOVERABLE RESERVES, RESOURCE ALLOCATION, RETURN, RISK NEUTRAL, RISK PREFERENCES, SAVINGS RATES, SOCIAL CAPITAL, STEAM TURBINE, STRIKE PRICE, SUSTAINABLE DEVELOPMENT, TAKEOVER, TREASURY, TREASURY BILLS, TROUGH, TURBULENCE, UNDERLYING ASSET, UNEMPLOYMENT, USE VALUE, UTILITIES, VALUATION, VALUATIONS, VARIABLE COST, WAGES, WAREHOUSE, WATER POLLUTION, WEALTH, WELFARE ECONOMICS