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Project Evaluation: A Pracitcal Asset Pricing Method

Henry D. Jacoby and David G. Laughton

Year: 1992
Volume: Volume 13
Number: Number 2
DOI: 10.5547/ISSN0195-6574-EJ-Vol13-No2-2
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Abstract:
This paper presents a practical approach to project evaluation using techniques of modern financial economics, with a sample application to oil development under a complex tax system. The method overcomes shortcomings of conventional discounted cash flow (DCF) methods which are either imprecise about the relation between economic value and uncertainty, or are rigid and unrealistic in the required assumptions about how a project's risks (and therefore its value) are influenced by market conditions, the project physical structure, and tax and contract provisions. It is based on the formulation and estimation of an "information model" which represents the resolution over time of uncertainties underlying a project (oil prices in the examples shown). The project can then be valued using derivative asset valuation, which replicates the consequences of a complex asset by a traded portfolio of simpler assets (in our case, riskless bonds and future claims on oil).





The Potential for Use of Modern Asset Pricing Methods for Upstream Petroleum Project Evaluation: Concluding Remarks

David G. Laughton

Year: 1998
Volume: Volume19
Number: Number 1
DOI: 10.5547/ISSN0195-6574-EJ-Vol19-No1-6
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Abstract:
MAP methods are continually being refined and expanded. In these concluding remarks I would like to touch on some of those developments, and then briefly to mention some steps that might be taken by an organisation that wants to explore this field further.





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