Application of the real options valuation method to estate projects
DOI:
https://doi.org/10.4067/S0718-28132013000200005Keywords:
NPV, uncertainty, real options, estate projectAbstract
In this work the real options methodology is applied to an estate project taking into account the project variability. At the same time the traditional Net Present Value NPV evaluation is carried out since it is what the estate sector uses normally in this type of projects. The NPV represents how much will increase the value of a company if the project is carried out. However, this economic evaluation considers only one possible scenario expected, assuming a fixed management during the whole project life. The investment analysis theory has included the investment opportunities valuation from the financial options valuation theory within a flexible and uncertain environment. This is known as the theory of real valuation options, which arises as a complement to the traditional project evaluation methods. With the aim to apply this proposed method, an estate project of houses located in the Great Concepción is considered with houses in the price range of UF1000 up to UF1500. This project was first evaluated through the traditional methodology and later on it was evaluated using the real options method, applying the transformed logarithm binomial model. It was verified that the project value increased significantly in relation to the traditional evaluation since real options were included such as abandonment and expansion. Therefore, the evaluation methodology by means of real options shows the potential that a project can have when uncertainty is prevalent, which is incorporated in the adding value to the project.
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