A COMPUTER SYSTEM FOR REAL OPTION ANALYSIS OF INVESTMENT IN SHIPS F. C. M. Pires Jr, Rio de Janeiro Federal University, Brazil M. Rezende Filho, Gama Filho University, Brazil SUMMARY The paper presents the main features of a computer system for support the analysis of investment in ships, based on Real Options Analysis – ROA and Monte Carlo simulation. ROA has been increasingly adopted for large projects, subject to high degree of uncertainty and presenting significant managerial flexibility. Despite of the recognized applicability in shipping, ROA is not normally applied, mainly because of the technical and operational complexity. The system aims at overcoming these problems, and was designed to make feasible ROA application by non-specialists. The proposed ROA methodology for shipbuilding projects may incorporate options of abandon, defer or lay-up. The models for stochastic series of time-charter rates and ship prices, necessary for ROA, may be automatically or interactively selected. The system also allows the interactive definition of the cash flow structure, including the managerial options to be considered. The architecture of the computer system and the user interface are discussed. 1. INTRODUCTION The shipping markets are extremely volatile and unpredictable. Uncertainty and risk issues dominate the decision making processes related to chartering, selling, buying or building a ship. Real Options Analysis - ROA has been increasingly used in assessment of investment decisions in presence of relevant uncertainty, in most economic sector, in the last years. In these cases, there is normally some managerial flexibility, for example, to interrupt, abandon, or expand the project, during the lifespan, depending on the information made available along the operation period. On the basis of an analogy with the financial options market, the options related to these flexibilities are valued, and the value of these options is added to the project net present value (NPV). Considering the Real Options value, some projects originally negative-NPV may become positive-NPV. This approach fits better the real world investment decisions. Real Options Analysis (ROA) for some time has been considered as an efficient and modern approach to capital budgeting. Notwithstanding the clear adherence of ROA approach to shipping sector characteristics, it is normally not so used in practice as it is in many other sectors with comparable risk level. However, ROA has recently attracted the attention of both shipping academics and practitioners. The likely main obstacle to dissemination of ROA in ship investment is the complexity of the models, which require skilled professionals, trained in financial assessment, analysis of stochastic processes and computer simulation techniques. This is not compatible with the environment of a typical shipping company. The main objective of the system herein presented is to overcome this problem. The computer system proposed will allow non-specialists to perform a complete Real Options Analysis, specifically for investment in ships. 2. REAL OPTIONS ANALYSIS - ROA The ROA has emerged from an analogy with financial options. A financial option gives the owner the right to buy or sell a particular asset at a predetermined date, for an exercise price specified in the contract. To buy an option, the holder shall pay a premium to the option writer. Prize amount is directly related to the conditions of the option contract. The existence of uncertainty and the possibility of change in the scenario until the maturity date can make the option attractive to investors. From the point of view of the options dealer, the greater the uncertainty (measured by the market volatility), the greater the profit expectation. An option contract provides loss risk limited to the premium, and unlimited earning opportunities. If at maturity, the holder chooses not to exercise, the whole loss will be the premium paid for the option. An analogous reasoning would be used for real options, as above introduced. Thus, the greater the uncertainty involved, the greater the value of the real option. The ROA approach to analysis of investment in real assets is based on this analogy. The relevant value of an investment project will incorporate not only the expected NPV, but also the value of existing options of abandon, interrupt or expand the project in the future, like in the following expression: