Optional Approach for Investment Projects Valuation and It’s Appliance to the Project of Producing Healthy Organic Food

Adnan Rovcanin, Minela Nuhic and Amin Sejdic
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Adnan Rovcanin: University of Sarajevo, Faculty of Economics
Minela Nuhic: University of Sarajevo, Faculty of Economics
Amin Sejdic: University of Sarajevo, Faculty of Economics

Economic Analysis, 2011, vol. 44, issue 3-4, 44-58

Abstract: The aim of this paper is to present the appliance possibilities of optional approach to investment projects valuation, as well as new theoretical and methodological framework of investment analysis, to project of producing and selling healthy organic food. Unlike traditional methods of project valuation, this new, contemporary approach provides valuation of management flexibility and possibility of adjustment (correction of previous decisions) in accordance to the market conditions. In light of dramatic changes and increasing risks and uncertainty in investment decision-making, it is necessary to complete the traditional approach by optional, in order to make more rational allocation of resources. The necessity of using optional approach is reflected from the fact that the results of projects valuation according to the traditional and modern approach may be contradictory. This paper presents the Black-Scholes and binomial option pricing model, and appliance of option valuation is shown on the project of producing and selling healthy organic food and healthy food restaurant as an extension activity. While traditional methods of valuating investment projects valuated the project of producing healthy organic food as unprofitable, the optional approach shows that this project is acceptable, which confirms the importance of this approach.

Keywords: Real options; flexibility; risk; uncertainty; project valuation; organic food (search for similar items in EconPapers)
JEL-codes: O20 Q18 (search for similar items in EconPapers)
Date: 2011
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