Texaco: A Real Options Analysis

Discounted Cash Flow depth psychology versus Real natural selections Analysis agree to Chapter 13 of the Fundamentals of monetary Management text, the conventionalistic method apply for evaluating detonator investments was the discounted funds flow (DCF) analysis method, which has been white plague since the fifties (Brigham & Houston, 2007, p. 416). The DCF method takes estimated cash flows and discounts them back to the expected profits pitch Value (NPV). In recent years, many companies, particularly those in oil, energy and pharmaceutical industries have begun to make bang-up bud annoying decisions utilize real options analysis (Sammer, 2002). This could be attributed to demonstrations over time that the handed-down DCF method may not lead to accurate cap bud pick outing decisions (Brigham & Houston, 2007, p.416). As opposed to the child standardized DCF method, real options analysis takes into destine the risks and rewards of future uncertainty or volatility (Paul-Choudhury, 1999). Many companies, the like Texaco, Inc. (now ChevronTexaco) are now angle of dip towards the real options method and using it as a panegyrical technique to the more traditional methods such as DCF and decision-tree analysis, or else of as a discern method of valuation (Benoît Couët et al., 2003).

Incorporating Real option Analysis at Texaco Soussan Faiz, a former manager of orbiculate valuation service at Texaco (Paul-Choudhury, 1999), was charged in the mid-1990s, with insure whether the firm should maintain and exploit a substantial, long-held operate in a developing state or if they should exit the conduct (Sammer, 2002). This had become a seminal fluid of debate among many of Texacos executive management team, in which some believed the lease to be worthless and wanted to use the proceeds from the sale for other capital investments, while others scene it could prove to be bankable and was worth further victimization (Benoît Couët et al., 2003). In beau monde to settle this slippy decision, Faiz began by constructing a...If you want to get a full essay, order it on our website: Ordercustompaper.com

If you want to get a full essay, wisit our page: write my paper