Real Option Analysis of Multi-Stage Investment on Resources Development Project by Improved SSA Method

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  • ADACHI Tsuyoshi
    Institute of Industrial Science and Environmental Science Center, The University of Tokyo
  • MOGI Gento
    Department of Technology Management for Innovation, Graduate School of Engineering, The University of Tokyo
  • ADACHI Tetsuo
    Nippon Yakin Kogyo Co., LTD.

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Other Title
  • 改良ＳＳＡ法による多段階投資からなる資源開発プロジェクトのリアルオプション分析
  • カイリョウ SSAホウ ニ ヨル タダンカイ トウシ カラ ナル シゲン カイハツ プロジェクト ノ リアル オプション ブンセキ

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Abstract

Resources development projects including the early stage of exploration usually consist of multi-stage investments. Managers of such project have an option to invest or wait to a further stage at appropriate timing in each stage. These options have to be integrated into a comprehensive option as a compound option. In this study, we develop MSSA (Multi-stage SSA) method to evaluate multi-stage compound option by improving ordinary SSA (Stratified State Aggregation) method. MSSA which is one of the numerical computation technique based on Monte Carlo simulation has a flexibility to evaluate various uncertainties on a project.<BR>In a case study, project value of a crude oil development which has price and geological uncertainties has been evaluated by MSSA method. Geological uncertainties are decreased according to progress in the project stages as the result of exploration investment. Consequently, the project value and investment timing distribution considering compound option are calculated. Critical value maps for decision making are also obtained by varied initial crude oil price and expected oil reserves.

Journal

  • Journal of MMIJ

    Journal of MMIJ 124 (9), 576-582, 2008

    The Mining and Materials Processing Institute of Japan

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