Evaluating Natural Resource Investments, Essay Example

What do real options add to the NPV technique? Under what circumstances can or should real options be utilised?

In the field of finance, finding the most strategic way of utilizing monetary resources is a vital part of the operation. It could be understood that through time, economic developments have been fully dependent and identifiable through the changing tides by which financial assets are viewed based on the general performance imposed by organizations as well as individuals in relation to how they contribute to the twists and turns of the global economy. Practical operations of economic establishment and stabilization involve economists and primary role players in business as they make decisions as when or how a particular set of financial asset is to be invested in particular financial policies that are designed to provide a more beneficial form of development for businesses and individuals owning the said assets.

The real option valuation is a primary element that is seen to have a distinct impact on how economists and business owners intend to decide on the manner of investment they are to take into account. Real option valuation or ROV is defined as the right of an investor [individual or organization] to decide on how a particular asset is to be released and used for investment. Unlike typical options of secured investments, real option valuation includes distinct risks that investors ought to give careful attention to. In organizations, the management is highly recommended to join the process of decision making and insist on how a particular set of assets would be used as point of investment that would serve the organization’s role and goals largely in the future.

Utilizing the real option valuation procedure in determining the real value of an investment and how it could benefit the organization later on could be better identified through the application of Net Present Value. This approach entails to make a definite connection between the current value of the investment and the possible value it is to take into account within a specific span of time considered in the investment process. Measuring percentage gains allows investors to decide on whether or not a particular stock-policy would fit their expectations as well as their goals for the organization’s definite point of financial growth. Regarding this matter, one particular question ought to be considered: At what point would we be satisfied as to addressing the future risk within and around an investment given that no one knows what the future holds? True to its sense, the assumption of possibilities is given particular attention to by investors. Real value of investment measured through the changing tides of the world economy and the cash flow behavior of particular monetary assets of the business or the individual investors. With the observation of the trading activities and the cash flow behavior of the general financial resources used in the general and distinct course of economic development, it could be made certain how measurement of assets could help investors in understanding the real value of a particular investment.

In a concise presentation of facts, it could be understood that when it comes to making a definite turn on how investment issues are to be decided upon, monetary valuation needs to be measured accordingly from the point of investment towards the point of maturity. The said value would fully identify whether or not the policy chosen for enrollment would actually be a justified choice that investors could use in order to embrace a new sense of financial growth for the whole organization. True to its sense, as seen from the article and as learned from the discussions, good investment policies do not only provide assured gains within a matter of immediate time; instead, it shows how risks and other factors of investment could be accounted for, especially in making a distinct decision of putting up a particular asset for imposed future gains. Such consideration aims to make the point of valuation and measurement of actual worth of the investment in the future could be fully given attention to. Remarkably, investors today recognize the need to seek strategies to lower risks as much as possible; however if these risks cannot be fully avoided, at least working around them through applying effective forms of business strategies does impose a more extensive manner of directing business decisions into something that would increase the improved essence of organizational value and the ways by which it could be improved through imposing a better sense of valuing monetary investments as definite forms of protection for the primary assets of the organization.

References

Brennan, J.; Schwartz, E. (2005). “Evaluating Natural Resource Investments”. The Journal of Business 58 (2): 135–157.

Datar, V.; Mathews, S. (2004). “European Real Options: An Intuitive Algorithm for the Black Scholes Formula”. Journal of Applied Finance 14 (1).