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Working Paper

Real Options and Project Evaluation : A Primer

SOCIAL ACCOUNTING APPROACH ARBITRAGE ASSET VALUE AVAILABILITY BALANCE BANK POLICY BENCHMARKING BUDGETING CALL OPTION CALORIFIC VALUE CAPITAL FORMATION CAPITAL INVESTMENT CAPITAL STRUCTURE CASH FLOW CD COAL COLLECTIVE ACTION COMMODITIES COMPARATIVE ADVANTAGE COMPENSATION FUND COMPETITIVE MARKET CONSUMERS CONTINGENT VALUATION CORPORATE FINANCE CORPORATE INVESTMENT COST ANALYSIS COST BENEFIT ANALYSIS COST EFFECTIVENESS COST OF CAPITAL CRUDE OIL DAMAGES DECISION MAKING DECISION TREE DEVELOPING COUNTRY DEVELOPMENT STRATEGY DIESEL DISCOUNT RATE DIVIDENDS DRILLING ECONOMIC ANALYSIS ECONOMIC DYNAMICS ECONOMIC POLICIES ECONOMIC VALUE ECONOMIC WELFARE ELECTRONIC BANKING EMPIRICAL ANALYSIS ENERGY GENERATION ENVIRONMENTAL ENVIRONMENTAL RISK EQUILIBRIUM EQUIPMENT EXPECTED VALUE EXPECTED VALUES EXPENDITURE EXPORTER EXTERNAL FUNDING FINANCIAL MARKETS FIXED COSTS FIXED EXCHANGE RATE FOOD POLICIES FORECASTS FOREIGN INVESTMENT FOREIGN INVESTORS FUEL FUEL COST FUEL OIL FUTURES GAS PLANTS GAS TURBINE GROSS DOMESTIC PRODUCT GROWTH POTENTIAL HEAT HEAT RATE HEAT RECOVERY HEAVY FUEL OIL HOLDING HUMAN RESOURCES INFORMATION TECHNOLOGY INFRASTRUCTURE DEVELOPMENT INFRASTRUCTURE INVESTMENTS INSURANCE INTANGIBLE INTANGIBLE ASSETS INTEREST RATE INTERNATIONAL MARKET INVESTING INVESTMENT BEHAVIOR INVESTMENT CHOICES INVESTMENT DECISION INVESTMENT OPPORTUNITIES INVESTMENT PROCESS INVESTMENT PROJECTS INVESTMENT SPENDING IRREVERSIBILITY JUDICIAL SYSTEM LAND USE LIABILITY LIABILITY MANAGEMENT LOAN LOSS OF REVENUES MARKET CONDITION MARKET ECONOMY MARKET PRICES MARKET RISK MARKET SHARE MARKET SIZE MATURITY MOBILE PHONES MULTIPLIERS NATURAL GAS NATURAL RESOURCES NET VALUE NPV OIL OIL EXPLORATION OIL FIELD OIL PRICE OIL PRICES OIL RESERVE OIL SECTOR OPPORTUNITY COST OPTION VALUE OWNERSHIP STRUCTURE PETROLEUM PIPELINE POLICY MAKERS POWER POWER PLANT PRESENT VALUE PRICE CHANGES PRIVATE INVESTMENT PRODUCTION COSTS PUBLIC GOOD PUBLIC SPENDING PUT OPTION RATE OF RETURN RECOVERABLE RESERVES RESOURCE ALLOCATION RETURN RISK NEUTRAL RISK PREFERENCES SAVINGS RATES SOCIAL CAPITAL STEAM TURBINE STRIKE PRICE SUSTAINABLE DEVELOPMENT TAKEOVER TREASURY TREASURY BILLS TROUGH TURBULENCE UNDERLYING ASSET UNEMPLOYMENT USE VALUE UTILITIES VALUATION VALUATIONS VARIABLE COST WAGES WAREHOUSE WATER POLLUTION WEALTH WELFARE ECONOMICS
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World Bank, Washington, DC
Middle East and North Africa | Morocco
2017-06-27T18:59:25Z | 2017-06-27T18:59:25Z | 2011

In this paper authors present a preliminary approach to the evaluation of policies and projects based on current thinking on cost benefit analysis and real option methodology and the authors' recent work on the same subject. Authors start from the assumption that economic agents undertake investment projects in order to create and exploit opportunities for increasing profits, growth, wealth and, ultimately, their welfare. These opportunities are options, rights and not obligations to take some action in the future. They include not only projects undertaken, but also projects that could be adopted in the future and opportunities that can be further created or destroyed by this adoption. From the point of view of the welfare of an entire economy, opportunities enlarge the set of actions that may contribute to national wealth. Not only is this increased by the net flow of discounted benefits generated by new ventures, but also by the net value of the options created and destroyed by investment behavior. When companies develop investment opportunities, therefore, they contribute to national welfare in a more subtle, but not less important way, than when they are actively set to exploit some of these opportunities. By recognizing the direct contribution to country wealth of project design and planning, option theory may thus substantially change the theory and practice of decision making about capital investment.

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