REAL OPTION VALUATION WITH BINOMIAL LATTICE MODEL (A Case Study of Indonesian Fighter Development Program)

• Main Author: Syahbuddin (NIM 29116164), Yenny
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/31729
• Institution: Institut Teknologi Bandung

The Korean Fighter Experiment / Indonesian Fighter Experiment (KFX / IFX) joint development is a cooperation program between the Government of the Republic of Indonesia and the Republic of Korea. <br /> <br /> This program has a very long duration and is particularly vulnerable to the uncertainty especially caused by the political conditions, technology, and global economy of both countries. On October 2017, for the fourth time, this time decided by the Indonesian government, the program is postponed and the government asked stakeholders to review the program. Due to the many possible uncertainties that have and will occur during this program, it is necessary to re-evaluate the investment plan and determine the value of flexibility in future activities. <br /> <br /> <br /> The internal and external analysis finds that political factor is the most dominant factor to determine the continuity this program although from market analysis this product can sustainable for a long time. Human resource as an intangible asset also the important factor to sustainable the program. The Technology Readiness Level for some subjects of fighter technologies still has much lower than Korea. The traditional valuation (Discounted Cash Flow) method is used as a quantitative method to evaluate a new project. Unfortunately, the result of this method does not take into account a comprehensive of strategy at uncertainty conditions. On the contrary, Real Option Valuation method can capture those uncertainties through probability and volatility of future cash flow. Real Option Valuation assumes that management has the flexibility to adapt and revise future decision in changing circumstances. <br /> <br /> <br /> Since KFX/ IFX program has multi-stage /phase and some strategy choices, then binomial lattice model is chosen because this method can accommodate the uncertainty in the continuation of this program. The method also highly flexible and can accommodate most types of real options problems and also be modeled with sequence compound options. In this research, besides valuation for the main program, the valuation for a contingency plan is also calculated as a backup strategy. <br /> <br /> <br /> Real options method can be implemented by analyzing some strategies as options in order to find the new Net Present Value (NPV) that improve the NPV generated from the traditional valuation method. One of strategy/option is expanding option that means to maximize the production capacity by expanding the business of making composite parts for not only KFX / IFX. Another strategy is chosen to overcome the possibility if the government decides not to continue this program. Modify option should be proposed to make the company to be a supplier of tier-1 composite parts for civil aircraft. <br />