ABSTRACT
Real option analysis (ROA), an extension of discounted cash fl ow (DCF), has at its core the calculation of shareholder value and thus is a very powerful metric to value maritime investments. The basic principles underlying real options are intuitively appealing and readily understood by management, having been used for millennia. The fi rst recorded real options deal being that of the philosopher and mathematician, Thales of Miletus (circa 624BC-536 BC) who made a fortune by taking an option on renting olive presses in Miletus and Chios in Asia Minor at a set price and the crop turned out to be bountiful.1 Their intuitive appeal led Copeland and Antikarov (2001), to predict that by the end of the fi rst decade of the second millennium AD that real option analysis, ROA, would become the standard valuation metric. It is indeed true that most mainstream academic fi nance texts now include real option analysis as a tool for investment evaluation but perhaps we are still a little distance off from the analysis achieving “standard” investment evaluation status. Others (Triantis and Borison, 2001 amongst many) suggest that it is the process and discipline of framing an investment decision in real options terms that provides the greatest benefi t. If used as a conceptual tool, it allows management to characterise rather than calculate and communicate the strategic value of an investment project. Real options helps managers formulate their strategic options (Amram and Kulatilaka, 2000) enabling investment strategy to be crafted as a series of options that are continually being exercised to achieve both short and long term returns on investment (Yeo and Qui, 2003). The real option method enables decision-makers to leverage uncertainty and limit downside risk. In this current period of heightened business uncertainty ROA offers managers a very useful and an appropriate approach to evaluate investments and formulate strategy.
