Real options and challenges met with fuzzy real option valuation – Christer Carlsson (Institute for Advanced Management Systems Research)

To have a real option means to have the possibility for a certain period to either choose for or against making an investment decision, without binding oneself up front. The real option rule is that one should invest today only if the net present value is high enough to compensate for giving up the value of the option to wait. Because the option to invest loses its value when the investment is irreversibly made, this loss is an opportunity cost of investing. The main question that a management group must answer for a deferrable investment opportunity is: How long do we postpone the investment, if we can postpone it, up to T time periods?

We will show some of the challenges with real options planning and then introduce a (heuristic) real option rule in a fuzzy setting, where the present values of expected cash flows and expected costs are estimated by trapezoidal fuzzy numbers. We will determine an optimal exercise time by applying some results from the theory of fuzzy sets and also show some possible extensions that wait to be explored and exploited.