Evaluation of Investment Decision Using System Dynamics and Real Options

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university of isfahan

Abstract

Evaluation of investment desicion has the decisive and key role in management discussions. Usually invest resources introduce methods such as accounting rate of return, payback period, internal rate of return and net present value (NPV) for decision making in this scope and describe the net present value as most reliable method. NPV and other traditional evaluation methods assume constant factors in investment and don’t consider uncertainty in decision making. The main objective of this study is to provide a model for evaluating investment decisions by using of system dynamics and real option. In this study, system dynamic method with Systemic approach was used to cover the weaknesses of traditional methods such as NPV that evaluate the investment decision one-dimensionally. Also, to considering the uncertainty in the investment project, real option was applied. At the final step, real option have been used as a scenario in designed model. Grounded Theory was applied for determining the affecting variables. Obtained results showed that investing about 3*1011 Rials to creating new production capacity about 300000 units per month with reducing product sale price from 1.2 million Rials to 850000 Rials is most profitable state (scenario) of simulated model in specified time in software (end of tenth years). Also, expansion and contraction, two determined options were considered in a scenario and related results were obtained.

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References

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