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AbstractThe investment decisions that are assessed by
traditional financial criteria and strategic tools cannot
reflect efficiently the real value of investment project under
fierce environment fluctuation and uncertainty. In recent years,
performing of strategic investment was viewed as a relative
theory that extends from real option. Just like dynamic
programming that provides investors a method of contingent
decision and a solution to the deviation of investment
evaluation.The concept of real option is the value of real
assets include not only the intrinsic value but also the values
of opportunity and flexibility. The study aimed at the basic
concept and the structure of principle of real option to
investment decision. By the help of relative literatures, we can
build up the model of assessment of abandonment option and also
by using empirical test to prove the correctness of using the
real option to investment decision making.The results of this
study are:Investors will get higher value if they choose giving
up their investment when exit value of the firm is higher.If the
possibility of a firm giving up its operation is high, it will
increase the value of abandonment option value and firm''s value.
The real option assessment model is useful for evaluation of
real assets, and is more suitable to the situation that has more
uncertainties than NPV.The managerial meanings of the results of
this study are:In the economic backdrop of diversified,
competitive and declining market, investor should stop operating
and halt the idea of long term running of the investment.
Investors and entrepreneurs should own a determined spirit. They
should make proper decision in proper time to increase the
value. Hesitation only induces loss.The real option approach
provides another course to evaluation investment. A more
flexible and contingent way of decision is the most important
contribution of this approach.
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