Introducing a Real Option Framework for EVA/MVA Analysis
28 Pages Posted: 15 Oct 2020
Date Written: August 17, 2020
For the first time, a framework is introduced that allows for a real options analysis to be performed in an EVA/MVA-embedded binomial tree. This framework enhances traditional EVA/MVA analysis so that it can capture the additional value generated through strategic decision making during a project’s life. The EVA calculation is separated into three parts: a variable component, a fixed component in regard to the cash flow, and a fixed component in regard to the cost of capital. A reconciliation of methods shows that the EVA/MVA framework produces the same real option valuation as an equivalent NPV-embedded binomial tree.
Keywords: economic value added, EVA, market value added, MVA, real option, binomial tree
JEL Classification: G13, G00, G30
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