An assessment of optimal investment decision for emission control compliance for Odfjell SE : comparison of traditional DCF valuation and Real Option valuation as decision tools

Abstract

Increased focus on emission from the shipping sector has enforced new stringent regulations for the international maritime industry. Ship owners are forced to innovate and respond to the new regulations in a cost effective manner. The objective of this paper is to present the most prominent abatement solutions and assess the economical aspects associated with these. Our final analysis intend to identify the optimal investment decision from a traditional discounted cash flow (DCF) model and compare with results from a more comprehensive real option analysis (ROA). More precisely we hope to convince that the option to defer an investment decision offers managerial flexibility that should be given a considerable value. The applied valuation methodology for the real option pricing is the binominal approach with risk neutral probabilities. The framework, method and type of option is explained, and visualized thru diagrams in our thesis. The principal conclusion is that the optimal investment decision from both NPV analysis and ROA is dependent on the expected remaining lifetime of the vessels. ROA incorporates the value of deferral and the reduction of risk by postponing the decision. Our result from the ROA indicates a change in optimal investment horizon from the standard DCF.