Risk-adjusted valuation for real option decisions

• Subjective real option valuation uses same data inputs as traditional DCF analysis. The value of delay stems from the investor’s subjective views about risk premia. Cost and revenue uncertainties have complex effects on value. Hedging systematic can reduce delaying investment. may increase or decrease with idiosyncratic, un-hedgeable risk. We model investor heterogeneity using different required returns an investment evaluate impact By assuming no disagreement cash flows, we emphasize how preferences in particular, but also costs capital, influence a evaluation decision to invest now retain future. propose risk-adjusted facilitate investors’ making, response market opportunity. assessment arises their perceived misvaluation by market, so projected flows are discounted two rates representing market’s view. This liberates our perfect imperfect hedging assumptions instead, able illustrate effect when perceptions premia diverge. During crises periods, becomes more valuable idiosyncratic future increases, decision-maker rush too quickly level is exceptionally high. Our verifies features established classical real-option models provides many new insights importance modelling divergences decision-makers premia, especially during crisis periods. It has practical advantages because it requires parameter than basic flow approaches, such marketed asset disclaimer method, outputs much richer. They allow for interactions between cost well easy exploration hedgeable risks Furthermore, provide fully-adjustable Python code which all values be chosen user.