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A Fuzzy Real Option Valuation Approach To Capital Budgeting Under Uncertainty Environment

Author

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  • SHIN-YUN WANG

    (Department of Finance, National Dong Hwa University, 1, Sec.2, Da-Hsueh Rd., Shou-Feng, Hualien 974, Taiwan)

  • CHENG-FEW LEE

    (Department of Finance and Economics, Rutgers University, 94 Rockafeller Road, Piscataway, NJ 08854, USA;
    Department of Banking and Finance, Kainan University, No. 1 Kainan Rd, Shinshing Tsuen, Luchu Shiang, Taoyuan 338, Taiwan)

Abstract

The information needed for capital budgeting is generally not known with certainty. The sources of uncertainty may be the net cash inflows, the life of the project, or the discount rate. We propose a capital budgeting model under uncertainty environment in which the concept of probability is employed in describing fuzzy events and cash flow information can be specified as a special type of fuzzy numbers. The present worth of each fuzzy project cash flow can be subsequently estimated. At the same time, to select fuzzy projects and determine the optimal decision time under limited capital budget, we offer an example to analyze the results of the capital budgeting problem under uncertainty using a fuzzy real option valuation.

Suggested Citation

  • Shin-Yun Wang & Cheng-Few Lee, 2010. "A Fuzzy Real Option Valuation Approach To Capital Budgeting Under Uncertainty Environment," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 9(05), pages 695-713.
    • Handle: RePEc:wsi:ijitdm:v:09:y:2010:i:05:n:s0219622010004056
    DOI: 10.1142/S0219622010004056
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    Cited by:

    1. Chun-Hao Chen & Tzung-Pei Hong & Yeong-Chyi Lee & Vincent S. Tseng, 2015. "Finding Active Membership Functions for Genetic-Fuzzy Data Mining," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 14(06), pages 1215-1242, November.
    2. Yuhong Liu & I-Ming Jiang & Meng-I Tsai, 2019. "Influence of Managers’ Subjective Judgments on Project Abandonment Decision Making," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 18(02), pages 419-443, March.

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