  We model investor heterogeneity using different required returns on an
investment and evaluate the impact on the valuation of an investment. By
assuming no disagreement on the cash flows, we emphasize how risk preferences
in particular, but also the costs of capital, influence a subjective evaluation
of the decision to invest now or retain the option to invest in future. We
propose a risk-adjusted valuation model to facilitate investors' subjective
decision making, in response to the market valuation of an investment
opportunity. The investor's subjective assessment arises from their perceived
misvaluation of the investment by the market, so projected cash flows are
discounted using two different rates representing the investor's and the
market's view. This liberates our model from perfect or imperfect hedging
assumptions and instead, we are able to illustrate the hedging effect on the
real option value when perceptions of risk premia diverge. During crises
periods, delaying an investment becomes more valuable as the idiosyncratic risk
of future cash flows increases, but the decision-maker may rush to invest too
quickly when the risk level is exceptionally high. Our model verifies features
established by classical real-option valuation models and provides many new
insights about the importance of modelling divergences in decision-makers risk
premia, especially during crisis periods. It also has many practical advantages
because it requires no more parameter inputs than basic discounted cash flow
approaches, such as the marketed asset disclaimer method, but the outputs are
much richer. They allow for complex interactions between cost and revenue
uncertainties as well as an easy exploration of the effects of hedgeable and
un-hedgeable risks on the real option value. Furthermore, we provide
fully-adjustable Python code in which all parameter values can be chosen by the
user.
