Estimating the value of becoming a hub Sample Clauses

Estimating the value of becoming a hub. Since the gas production from each project is operated to meet the consumer’s demand, it is difficult to make the production to fit the capacities of the pipes and markets (Xxxxx Xxxxxxx, Xxxxxxxx Xxxxxxxxxxxx and Xxxxxx Xxxxxx, 1998). The most important point is how to determine the right capacity with less cost. The management may have different options after getting new information at each step. In this case, different from financial options, this project of valuing a hub could be taken as real options. In other words, managers have the right but not the obligation to invest in over capacity of gas pipeline system. We have already analyzed the possible future outcomes of becoming a hub by drawing an event tree. In the following, we are going to estimate the value of a hub if it exists today and how much of this value is likely to move up or down in the project’s life time (Xxx Xxxxxxxx and Xxxxx Xxxxxx, 2004). Assuming that if a hub system will be developed today, its value would be $ 1 billion (without option). The distribution of possible outcome in each period is fairly standard, the factor for an up movement is given by 1.8 and down movement is given by 0.6. Therefore, in one year later, its value would be worth either $1.2 billion or $ 600 million, depending on the market of the petroleum industry. If the hub’s value goes up to $1200 million under high demand of the market, the value of the hub could be either up to $1,440 million or down to $720 million in potential year two. If the hub’s value falls to $60 million in year one, its value could be either $ 720 million or $ 360 million in year two. Similarly, the value of a hub would be from $1,728 million to $216 million at the end of year three. These values of the hub are shown in the event tree (Figure 3.4) and it indicates that how much of the hub could be worth in each period. From this event tree, management may have a chance to decide whether to continue doing this project. In the real case, considering market and financial factors, the branches of tree could be even more complex.
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