Investment Appraisal of Next Generation Launch Vehicles using Real Option Theory

Abstract

The path to appraising an investment opportunity, and hence deciding whether to proceed and under what financial structure, is one of great importance to all commercial organisations. This is particularly true in the space transportation industry, where commercialisation has in recent years created an international launch market. At the present time, several organisations are involved in projects developing Next Generation Launch Vehicle (NGLV) technology. These projects are both extremely costly and present a considerable amount of financial risk; hence determining the optimal way in which to finance NGLV projects is a formidable problem. This paper applies the new discipline of Real Options to the appraisal of NGLV investments. This theory adds to the neo-classical DCF theory of investment evaluation through the consideration of an organisation’s ability to make decisions based upon contingent information as and when it becomes available.

From the analysis undertaken it is shown that NLGV development is financially feasible and, more importantly, is feasible in a purely commercial context. It is also demonstrated that such a project need not necessarily be the most conservative option and that the scope of current financing can be considerably widened to provide greater flexibility and greater security for both the project and its investors alike.