Real Option Valuation of Game Lodge

Abstract

Recent commercialisation of property in the Kruger National Park was done via the tendering of concession rights to five different properties. South African National Parks generated scenarios of possible future cash flows for private lodges on the concession sites. Based on the discounted values of these cash flows, SANP identified what rental incomes they expected to receive from the different concessions. Following the public tender of the concessions, SANP found that they had grossly underestimated the value of the concession rights. The actual tender values of the winning bidders far exceeded SANP’s projections. Furthermore, the winning bids also exceeded the mean concession fee valuations for each of the concession. The findings of this research, through the use of random stochastic modelling and Monte Carlo simulation show that real option valuation does account for the positive difference between the winning bids and the mean concession fee values for each of the concessions investigated