Texaco: A Real Options Analysis

Discounted Cash Flow Analysis 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) analysis 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 expected Net pitch Value (NPV). In recent years, many companies, particularly those in oil, energy and pharmaceutical industries have begun to make 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 opposed to the simple DCF method, real options analysis takes into delineate the risks and rewards of future uncertainty or volatility (Paul-Choudhury, 1999). Many companies, the like Texaco, Inc. (now 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 service at Texaco (Paul-Choudhury, 1999), was charged in the mid-1990s, with determine whether the firm should maintain and commercialize a substantial, long-held operate in a developing country or if they should exit the lease (Sammer, 2002). This had become a source 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 thought it could prove to be bankable and was worth further exploitation (Benoît Couët et al., 2003). In order to settle this tricky decision, Faiz began by constructing a...If you want to get a full essay, order it on our website: Orderessay



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