Our Approach

 

Our approach is rigorous in its analytical focus. Our goal is to improve managements understanding of what drives project value and lay the framework that will ensure implementation of optimal execution strategies. We are highly cognizant of the fact that not every organization is in the same “place” when it comes to changing the way investment decisions are made and executed.

A key underpinning of our approach will focus on change management – an effort that will require, for example, discussions with all key stakeholders and executives involved in making and managing the execution of key strategic investments. These initiatives will play a crucial role in the implementation of Real Options thinking on a day-to-day basis and its proliferation throughout the entire decision-making structure.

Our approach to Real Options Analysis will leverage a client’s existing NPV analyses. Risk analysis and simulation will be performed on NPV to better understand model assumptions and identify critical value drivers. Project free cash flow volatility will be derived using the Logarithmic Cash Flow Approach, Monte Carlo simulation or other appropriate methods. With cash flow volatility in-hand, all necessary input variables are available for use in the Real Options Analysis. Real Options specific to the project will be defined and a model will be developed to extract options value. Depending on the situation, these may leverage Binomial Lattices with Closed-Form Models, Closed-Form Partial Differential Equations, Stochastic Differential models, or other forms of simulation. A risk analysis will be performed on Real Options Analysis results to better understand model sensitivity. The final steps include results interpretation, i.e. the optimal pathway for options execution and the resulting project value should these options be executed as prescribed. Management will be presented with analysis results and an implementation plan.