Texaco: A Real Options Analysis

Discounted Cash Flow compendium versus Real natural selections Analysis According to Chapter 13 of the Fundamentals of Financial Management text, the traditionalistic method apply for evaluating detonator investments was the discounted cash flow (DCF) synopsis method, which has been used since the fifties (Brigham & Houston, 2007, p. 416). The DCF method takes estimated cash flows and discounts them back to the expect Net pitch Value (NPV). In recent years, umpteen companies, particularly those in oil, energy and pharmaceutical industries have begun to devil capital bud annoying decisions victimization real options analysis (Sammer, 2002). This could be attributed to demonstrations over time that the traditional DCF method may not lead to accurate capital budgeting decisions (Brigham & Houston, 2007, p.416). As impertinent to the simple DCF method, real options analysis takes into delineate the risks and rewards of future dubiety or volatility (Paul-Choudhury, 1999). Many companies, the like Texaco, Inc. ( straightway ChevronTexaco) are now leaning towards the real options method and using it as a complimentary technique to the more traditional methods such as DCF and decision-tree analysis, instead of as a complete method of valuation (Benoît Couët et al., 2003).

Incorporating Real Option Analysis at Texaco Soussan Faiz, a former manager of ball-shaped valuation overhaul at Texaco (Paul-Choudhury, 1999), was charged in the mid-1990s, with determine whether the firm should hold and commercialize a substantial, long-held operate in a development country or if they should exit the l ease (Sammer, 2002). This had become a sou! rce of debate among many of Texacos executive forethought team, in which some believed the lease to be worthless and cute to use the proceeds from the sale for other capital investments, composition others thought it could prove to be bankable and was worth supercharge exploitation (Benoît Couët et al., 2003). In order to nail this tricky decision, Faiz began by constructing a...If you want to get a lavish essay, order it on our website: BestEssayCheap.com

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