Define the concept of a real option, Financial Management

Define the concept of a real option. Discuss some real options a firm can be confronted with when investing in real projects.

A positive APV project is accepted under the supposition that all future operating decisions will be optimal. The management of firm does not know at the inception date of a project what future decisions it will be confronted along with as all information concerning the project has not yet been learned. Accordingly, the firm’s management has alternative paths, or options, that it can take like new information is discovered. The application of options pricing theory to the evaluation of investment options in real projects is termed as real options.

The firm is confronted with several possible real options over the life of a capital asset. For instance, the firm may have a timing option as when to make the investment; it may have a growth option to raise the scale of the investment; it may have a suspension option to temporarily cease production; and, it may comprise an abandonment option to quit the investment early.

Posted Date: 5/11/2013 1:43:08 AM | Location : United States

Related Discussions:- Define the concept of a real option, Assignment Help, Ask Question on Define the concept of a real option, Get Answer, Expert's Help, Define the concept of a real option Discussions

Write discussion on Define the concept of a real option
Your posts are moderated
Related Questions
Evaluate the importance of leverage of financial management on a small scale company.

Q. Explain about Book Value Weights? Book Value Weights: - Book value weights are calculating form the values taken from the balance sheet. The weight to be assigned to every s

Chi Square Test as a Test of Independence In real life decision making, managers often have to know whether the differences between the proportions observed from a number of sa

Account balance - Inherent risk At account balance / class of transaction level Balances susceptible to misstatement. History of errors. Complexity of transac

Question: (a) Explain and discuss the hedging strategies using futures (b) Boeing (an American company) delivered on 1st September 2008 an airplane to a Canadian company.


Global Equity Indexes: As described earlier in this chapter, there are several stock market indexes available which depict the performance of particular sectors and a country a

If you are doing PVA and FVA problems, what difference does it make if the annuities are "ordinary annuities" or "annuities due"? In PVA or a FVA of annuity due trouble, annuit

how to write an assignment for this topic

A friend is looking for advice on one of his investments, KER. KER manufactures stationery supplies, the entity appointed a new Chairman in 2008 and since then has been executed an