Optimal Timing Strategies
for Capital Investment
Using Real Options Analysis

 

 

 

Introduction

 

 

This project has been undertaken by Philippa Dodgson and Gavin Bell, as a part of the 2006 Management Science Honours Programme at the University of Canterbury. The aim of undertaking the project is to gain experience in working on a ‘real-life’ business problem for a client company in the community.

The project involves an investigation, for a New Zealand electricity company, into whether Real Options Analysis (ROA) can be used to evaluate capital investment decisions in the electricity sector. Essentially, the project is a ‘proof of method’, which will be carried out on a sample problem, comprising an investment decision that this company is currently facing.

The Real Options Analysis framework is assessed, and the implications of this approach are examined. From the findings, recommendations are made as to whether Real Options Analysis could be considered a valid decision-making tool for the client.

 

 

 

More Information

 

 

Click on the following links for further information about this project:

Background to the Problem

Real Options Analysis

Solution Method – Stochastic Dynamic Programming

MATLAB Implementation

 

 

 

About the Authors

 

 

Philippa majored in Management Science for her Undergraduate degree which she completed in 2005, but also has a strong background in Economics, having originally intended this to be her major. She has sound analytical skills which have been employed in the undertaking of this project. In the future, Philippa plans to work as a consultant, specialising in Electricity Market modelling, where she will utilise her extensive experience at programming in zip. Philippa can be contacted on pjdodgson@hotmail.com.

For his Undergraduate degree, Gavin majored in Statistics and Management Science. He has previously undertaken research work in the University’s Department of Mathematics and Statistics. In this role, he gained strong skills in programming in Matlab, which were utilised in the modelling aspects of this project. Upon completing his Honours year, Gavin plans to move into Finance. Gavin can be contacted on gavin@thebells.co.nz. His University profile is located here.

 

 

 

Acknowledgements

 

 

Philippa and Gavin would to thank all of the people who have contributed to the success of this project.

In particular, Dr. Shane Dye and Dr. Terri Green, both from the University of Canterbury’s Management Department, who were the Academic supervisors on this project. Your guidance and advice have been invaluable.

Also, we would like to thank the many staff members at the company this project was undertaken for, who provided their time and expertise over the duration of the project.

Finally, a special shout-out to Nigel ‘50%’ Granger for his wise counsel regarding the electricity industry. Cheers mate.