Managing Projects Flexibly: An Application of Real-Option TheoryUBC Departmental Archives from UBC Department of Economics Abstract: The value of managerial flexibility is assessed empirically using data on prices, unit costs, ore extraction, grade, reserves, and metal output for a panel of twenty one Canadian copper mines. A real-option model is estimated and solved to yield the value of the project as well as the option value that is associated with flexible operation. Most previous empirical researchers have considered the initial-investment decision but have neglected the possibility of flexible operation thereafter. Moreover, although they have assumed that price is stochastic, they have ignored cost and reserve uncertainty. Finally, they have modeled price as a geometric Brownian motion or other nonstationary process. Transition equations for three state variables, copper price, unit cost, and remaining reserves, are estimated here. Differences in assumptions compared to previous studies (stationary vs. nonstationary stochastic processes and flexible vs. inflexible operating policies) are found to lead to large differences in estimated project and option values. Keywords: MANAGEMENT; UNIT ROOTS; EVALUATION; MINING (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Access Statistics for this paper More papers in UBC Departmental Archives from UBC Department of Economics |
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