"TOPIC 14-STAGE 5-MICRO"
In conditions of uncertainty, new situations may involve new strategies of the managing team to adapt to the changes in the environment. This ability to modify the project strategies can become a competitive advantage if it has been assessed in advance, before the choice of project, because it allows taking into account a more accurate value of the project. Thus, the decision-making can be carried out in better conditions, taking into account the value of the intangible assets.
This paper aims to derive the mathematical expression of the real option to abandon an investment. This technique has been studied extensively from an academic point of view. Nevertheless, in business practice real options have not been used sufficiently, mostly because complex mathematical calculations are involved.
Some authors, like Sporleder and Bailey (2001), consider real options as the basis for evaluating producer investment in a start-up cooperative that involves technological uncertainty. Encouragement of phased decision-making is very important in cooperatives: “The potential for cooperative applications of real options is certainly robust” so “further research is necessary in applying real options specifically to cooperatives” (Bailey and Sporleder, 2000).
Thus, we will deduce a specific mathematical expression, with similar parameters to those used in the expression of the Net Present Value, being the final objective to facilitate the labor of the management team in assessing the option to abandon value in a cooperative. In this case, the value of the option to abandon allows the incorporation into the project value of the operating flexibility (Damaraju et al., 2015).
Finally, a numerical example of a cooperative project including the option to abandon is developed. Given that the option to abandon works in a similar way to an American put option, the employed methodology is the binomial option pricing model, a noteworthy model to value financial options.
Bailey, M.D. & Sporleder, T.L. (2000). The real options approach to evaluating a risky investment by a new generation cooperative: further processing. In Annual Meetings of NCR-194 research on cooperatives, Las Vegas, NV, December.
Damaraju, N.L.; Barney, J.B. and Makhija, A.K. (2015). Real options in divestment alternatives. Strategic Management Journal, Vol. 36, No. 5, pp. 728-744.
Sporleder, T.L. & Bailey, M.D. (2001). Using Real Options to Evaluate Producer Investment in New Generation Cooperatives. American Agricultural Economics Association.
Topic #14 Measuring and Assessing Co-operative Performance and Resilience
