3. Differences between APV and option valuation
Valuing MW Acquisition by using APV method assumes in practice that exploiting of all MW’s reserves is certain and happens right after the acquisition. In other words, the APV method excludes the flexibility in future decision making. In this case, Apache has both an option to defer the exploiting of reserves into future and Apache may also choose not to exploit the MW reserves at all. As some of MW’s reserves are actually real options, the APV valuation method actually underestimates the real value of MW acquisition. If Apache defers the exploiting of the reserves, there exists a possibility for the future cash flows becoming even more valuable. For example, Apache could have more precise information about the value of the cash flows from reserves. In addition, Apache might have more accurate information about the amount of oil that the reserves contain or about the development of oil prices in the future. This opportunity to obtain more accurate information must value something. In addition, instead of paying certain and instantly occurring negative initial costs, Apache can actually defer and even rejected them if the economic situation appears unfavorable. Consequently the value of the reserves should be more than just the discounted cash flows assuming immediate exploiting of the reserves. As the option valuing method takes into account the option value of the reserves we can conclude that by using this method the MW’s reserves should be valued higher than by using APV method. The following table presents the value of MW’s reserves calculated with APV, discounted cash flow, and different maturity real option valuing methods:
Since APV method takes into account the side effect of debt financing, it is somewhat greater than the value obtained by simply discounting all the cash flows from future into...
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