Abstract:

The application of the financial option method to the valuation of investments in the capital market requires a number of conditions to be met, including the demonstration of the analogy occurring between the factors of the investment and the variables of the valuation model. The prevailing view in the literature is that as the value of the underlying assets in an option model, the cash flows that the project would generate during the operating period are best suited. The article verifies this position, shows its flaws and proposes an alternative solution of replacing the "operational" value of the project with a "development" value.

The article is structured as follows. The first part briefly characterizes the development process of photovoltaic farms in Poland, presenting it in the form of an investment-decision model. The second part analyzes the option method as a tool for economic valuation of a project in the capital market, with particular attention to the analogies that must be made between the variables and decision-making mechanisms in the option model and the project. On this basis, the development process of the photovoltaic farm was expressed as a compound option. The third part evaluates the investment, explains the binomial procedure used and interprets the results obtained. The fourth part presents the disadvantages of the approach described above and proposes a modification of the method using the example of the project in question. The last part contains conclusions and discussion.