PULL OUT OF TATA NANO FROM SINGUR- MAY BE A JOURNEY FROM NOW-OR-NEVER NPV TO FLEXIBLE, UNCERTAIN REAL OPTION PATH

Abstract

It was Stewart Myers who pioneered the concept that financial investments generate real options and also coined the term real options in 1977. While many proponents of real options like Copeland and Antikarov (2001) and Trigeorgis (1995) etc. are critical of NPV analysis. That is why, they claim that in coming 10 years, real options will replace NPV as the central paradigm for investment decisions and it would dominate the capital budgeting process in next decade. Traditional NPV will no longer last in present highly volatile and uncertain era. Firm must apply flexibility and take shelter under Real Option path and can avail the scope of enhancing the project worth and start invest at right time and after availing right information. Tata’s Nano Story is nothing but a Holdup problem, further uncertainty and delay will enlarge the quasi-rent of it’s ancillaries and in that way it will further reduce the production cost of Nano and enhance project NPV. Hence we can expect Tata’s Nano will enter in the market when entire world car market and global economy will revive a-little and Commitment of Ratan Tata about Rs.1 lakh Nano car will be strategically feasible. In the process of project evaluation, the real option approach to Capex decision making can contribute for a significant amount. In this paper both Black & Scholes and Binomial method of real option are discussed. In principle, both of them allow the financial analyst to overcome the constraint on expected values inherent in the traditional DCF method. A real life application of this-- evaluating a R&D project is a good example which shows the power of the real options approach. This paper analyses the Tata-Nano case by using real option mechanism.