IDEAS home Printed from https://ideas.repec.org/a/ibn/ibrjnl/v12y2019i3p17-30.html
   My bibliography  Save this article

Real Option Analysis versus DCF Valuation - An Application to a Tunisian Oilfield

Author

Listed:
  • Lotfi TALEB

Abstract

The most widely used methods of choosing investments are undoubtedly the NPV. This method is often criticized because it does not allow to take into account certain main characteristics of the investment decision, notably the irreversibility, the uncertainty and the possibility of delaying the investment. On the other hand, the real options approach (ROA) is proposed to capture the flexibility associated with an investment project. This article examines whether the value of an undeveloped oil field varies according to whether the ROA or NPV assessment is used. In addition, to value the option to defer, we developed a continuous time model derived from previous work by Brenan and Schwartz (1985), McDonald and Siegel (1986) and Paddock, Siegel, and Smith (1988). The originality of the proposed model gives rise to a simple and uncomplicated method for determining the value of the option. Findings indicate that the two evaluation methods lead to the same decision, the project is economically profitable. In this oil investment project studied, despite the positive value of the option, the importance of projected cash-flows and optimistic forecasts of the price of oil, led us not to exercise the option and to undertake the project immediately.

Suggested Citation

  • Lotfi TALEB, 2019. "Real Option Analysis versus DCF Valuation - An Application to a Tunisian Oilfield," International Business Research, Canadian Center of Science and Education, vol. 12(3), pages 17-30, March.
    • Handle: RePEc:ibn:ibrjnl:v:12:y:2019:i:3:p:17-30
    as

    Download full text from publisher

    File URL: http://www.ccsenet.org/journal/index.php/ibr/article/download/0/0/38358/38904
    Download Restriction: no
    File URL: http://www.ccsenet.org/journal/index.php/ibr/article/view/0/38358
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fernandes, Bartolomeu & Cunha, Jorge & Ferreira, Paula, 2011. "The use of real options approach in energy sector investments," Renewable and Sustainable Energy Reviews, Elsevier, vol. 15(9), pages 4491-4497.
    2. John Elder & Apostolos Serletis, 2010. "Oil Price Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1137-1159, September.
    3. Luiz E. Brandão & James S. Dyer & Warren J. Hahn, 2005. "Using Binomial Decision Trees to Solve Real-Option Valuation Problems," Decision Analysis, INFORMS, vol. 2(2), pages 69-88, June.
    4. Robert McDonald & Daniel Siegel, 1986. "The Value of Waiting to Invest," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(4), pages 707-727.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Luiz Brandão & James Dyer, 2005. "Decision Analysis and Real Options: A Discrete Time Approach to Real Option Valuation," Annals of Operations Research, Springer, vol. 135(1), pages 21-39, March.
    7. Zettl, Martin, 2002. "Valuing exploration and production projects by means of option pricing theory," International Journal of Production Economics, Elsevier, vol. 78(1), pages 109-116, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martine Van den Boomen & Sjoerd Van der Meulen & Jonathan Van Ekris & Roel Spanjers & Olle Ten Voorde & Janwim Mulder & Peter Blommaart, 2021. "Optimized Expansion Strategy for a Hydrogen Pipe Network in the Port of Rotterdam with Compound Real Options Analysis," Sustainability, MDPI, vol. 13(16), pages 1-23, August.
    2. Salha Ben Salem & Moez Labidi, 2024. "Financial friction and optimal monetary policy: analysis of DSGE model with financial friction and price sticky," SN Business & Economics, Springer, vol. 4(7), pages 1-24, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Schachter, J.A. & Mancarella, P., 2016. "A critical review of Real Options thinking for valuing investment flexibility in Smart Grids and low carbon energy systems," Renewable and Sustainable Energy Reviews, Elsevier, vol. 56(C), pages 261-271.
    2. José Balibrea-Iniesta, 2020. "Economic Analysis of Renewable Energy Regulation in France: A Case Study for Photovoltaic Plants Based on Real Options," Energies, MDPI, vol. 13(11), pages 1-19, June.
    3. Carol Alexander & Xi Chen, 2021. "Model risk in real option valuation," Annals of Operations Research, Springer, vol. 299(1), pages 1025-1056, April.
    4. Luiz E. Brandão & James S. Dyer & Warren J. Hahn, 2005. "Using Binomial Decision Trees to Solve Real-Option Valuation Problems," Decision Analysis, INFORMS, vol. 2(2), pages 69-88, June.
    5. Luca Vincenzo Ballestra & Graziella Pacelli & Davide Radi, 2017. "Valuing investment projects under interest rate risk: empirical evidence from European firms," Applied Economics, Taylor & Francis Journals, vol. 49(56), pages 5662-5672, December.
    6. Hahn, Warren J. & Dyer, James S., 2008. "Discrete time modeling of mean-reverting stochastic processes for real option valuation," European Journal of Operational Research, Elsevier, vol. 184(2), pages 534-548, January.
    7. Dalbem, Marta Corrêa & Brandão, Luiz Eduardo Teixeira & Gomes, Leonardo Lima, 2014. "Can the regulated market help foster a free market for wind energy in Brazil?," Energy Policy, Elsevier, vol. 66(C), pages 303-311.
    8. Kitzing, Lena & Juul, Nina & Drud, Michael & Boomsma, Trine Krogh, 2017. "A real options approach to analyse wind energy investments under different support schemes," Applied Energy, Elsevier, vol. 188(C), pages 83-96.
    9. Zdenìk Zmeškal, 2008. "Application of the American Real Flexible Switch Options Methodology A Generalized Approach," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 58(05-06), pages 261-275, August.
    10. Guj, Pietro & Chandra, Atul, 2019. "Comparing different real option valuation approaches as applied to a copper mine," Resources Policy, Elsevier, vol. 61(C), pages 180-189.
    11. Kyungwon Kim & Jae Wook Song, 2018. "Managing Bubbles in the Korean Real Estate Market: A Real Options Framework," Sustainability, MDPI, vol. 10(8), pages 1-25, August.
    12. Fleten, Stein-Erik & Linnerud, Kristin & Molnár, Peter & Tandberg Nygaard, Maria, 2016. "Green electricity investment timing in practice: Real options or net present value?," Energy, Elsevier, vol. 116(P1), pages 498-506.
    13. Sungchul Kim & Ronald Giachetti & Sangsung Park, 2018. "Real Options Analysis for Acquisition of New Technology: A Case Study of Korea K2 Tank’s Powerpack," Sustainability, MDPI, vol. 10(11), pages 1-18, October.
    14. de Braganca, Gabriel Fiuza & Rocha, Katia & Moreira, Rafael Henrique Rodrigues, 2008. "Real Options and the Regulation of Brazilian Fixed-Line Telephone Operators: The Mark-up on the Cost of Capital," Working Paper Series 19098, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    15. Carlos Andrés Zapata Quimbayo, 2020. "OPCIONES REALES Una guía teórico-práctica para la valoración de inversiones bajo incertidumbre mediante modelos en tiempo discreto y simulación de Monte Carlo," Books, Universidad Externado de Colombia, Facultad de Finanzas, Gobierno y Relaciones Internacionales, number 138, April.
    16. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "Aplicación de las opciones reales en la toma de decisiones en los mercados de electricidad," Estudios Gerenciales, Universidad Icesi, November.
    17. Pedro Godinho, 2015. "Estimating State-Dependent Volatility of Investment Projects: A Simulation Approach," GEMF Working Papers 2015-02, GEMF, Faculty of Economics, University of Coimbra.
    18. repec:vuw:vuwscr:19098 is not listed on IDEAS
    19. Zmeskal, Zdenek, 2010. "Generalised soft binomial American real option pricing model (fuzzy-stochastic approach)," European Journal of Operational Research, Elsevier, vol. 207(2), pages 1096-1103, December.
    20. Carol Alexander & Xi Chen, 2012. "A General Approach to Real Option Valuation with Applications to Real Estate Investments," ICMA Centre Discussion Papers in Finance icma-dp2012-04, Henley Business School, University of Reading.
    21. Nunes, Luis Eduardo & Lima, Marcus Vinicius Andrade de & Davison, Matthew & Leite, André Luis da Silva, 2021. "Switch and defer option in renewable energy projects: Evidences from Brazil," Energy, Elsevier, vol. 231(C).

    More about this item

    Keywords

    NPV; continuous model; real option analysis; sensitivity analysis; theoretical model; Tunisian oilfield;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G00 - Financial Economics - - General - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibn:ibrjnl:v:12:y:2019:i:3:p:17-30. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Canadian Center of Science and Education (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.