Investment project appraisal: case of Russian breakfast cereal meals

Abstract

The research objective of the thesis is to discover how simulation modeling and real options appraisal can be combined to estimate future cash flows. The research question is how to combine real options and simulation modelling in the most useful way for decision makers. The research object is a corn flakes production company, and the subject – valuation technique based on simulation modeling and real options appraisal under uncertainty. The thesis consists of three parts: theoretical part, market analysis and investment project appraisal. The goal of the theoretical part is to formulate an algorithm of investment projects valuation, which combines simulation modeling and real options appraisal. In the second part, a comprehensive analysis of the Russian breakfast cereal meals market is conducted. The goal of the third part is to apply algorithm based on simulation modeling and Monte-Carlo technique to evaluate the investment plan of the studied company. It included input data specification, binomial lattice model, Monte Carlo simulation, investment valuation under revenue and cost uncertainty, risk-neutral option pricing and decision tree analysis. It could be concluded that the algorithm can be used for investment project appraisal. According to the algorithm, the focal project is evaluated as perspective and meets the investors’ requirements, and investors should accept the project.