Students: Dissertation: Hairong Karen Gui

ABSTRACT

The net present value (NPV) approach has been widely accepted by corporate practitioners and academics as the principal tool for evaluating the feasibility of corporate financial investment opportunities. It conceptually provides an estimate in present value terms of a proposed investment's incremental contribution to the firm, propelling the company's pursuit of its goal of value maximization. NPV uses a discount rate that in theory  captures all market risks. When used to value steady-return investments typical in mature industries, this method works reasonably well. However, in mature industries, this method works reasonably well. However, when used to evaluate investments with strategic values, and sometimes also with embedded contingent options, NPV is less able to capture the extensive investment returns associated with externality and contingent option values. Such investments are commonly seen in high uncertainty and high risk/high return profile (HIHRR) industries.

This dissertation employs a case study approach, analyzing the strategic investments in four flagship stores by one global company that is the most dominant in the sportswear retail industry (SRI) to ascertain that the real option )RO) methodology can be used to capture values associated with externalities and/or embedded contingent option values. The investments in this study included various embedded real options, namely, growth, expansion, staging, and delay. The cases include NPV projections made prior to the investment and retrospective application of RO to estimate possible strategic values. Using proprietary data, this study adds to the limited empirical evidence of real options model applications in the literature. Further, this study proposes that real options together with a disciplined investment review process should complement NPV analyses, especially when additional stategic and/or synergistic benefits are the rational for the investments. The findings demonstrate convincingly such an approach can be effective and useful in valuing investments that have strategic values embedded.

 May 5, 2011

DISSERTATION COMMITTEE

John Oh, Chair
Tom Gillopatrick
Janet Hamilton
Wayne W. Wakeland
Michael Wrinn, External Advisor

Phil Knight, External Advisor

Timothy Anderson, Graduate Studies Rep.