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

Ask an Expert

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

Write your message here..

Related Questions

Mid term quiz, iau.la/im/fin500.pdf need help with 100 questions with multi... iau.la/im/fin500.pdf need help with 100 questions with multiple answers quiz!

Effective use of focused marketing, a) A niche market refers to a lucrative... a) A niche market refers to a lucrative and small market segment. Marketing strategy is targeted and concentrated at this specific market segment. Pink Ladies are specifically targ

Define debenture, Debenture Debenture is a document holding an acknowl... Debenture Debenture is a document holding an acknowledgment of indebtedness on the part of organizations, usually secured by a charge on the company's assets.

Diffrence between present values of future cash, Q. Diffrence between prese... Q. Diffrence between present values of future cash ? The difference among the present values of future cash inflows generated by an asset and its cost is known as net present v

Seasonal variation in time series analysis, Seasonal Variation Under th... Seasonal Variation Under this variation, we observe that the variable under consideration shows a similar pattern during certain months of the successive years. An example of s

Exchange Rate Parity Conditions, 1) According to the IFE (RIP), if U.S. inv... 1) According to the IFE (RIP), if U.S. investors expect a 3% rate of domestic inflation over one year, and a 6% rate of inflation in European countries that use the EUR, and requir

Yield to put, Yield to put is the rate at which the present val... Yield to put is the rate at which the present value of cash flow to the first put date is equal to the price plus interest rate. It is used for

Explain compound value concept, Q. Explain Compound Value Concept? The ... Q. Explain Compound Value Concept? The Compound Value Concept is used to find out the FV of present money. It is the same as the concept of compound interest, wherein the inter

Define financial management, Financial management is that division of manag... Financial management is that division of managerial process which is concerned with the planning and controlling of firm's financial resources. It is concerned with the procurement

Deficiency in operation, Deficiency in Operation - This exists when a prope... Deficiency in Operation - This exists when a properly designed control doesn't operate as designed or when person performing the control doesn't possess the necessary authority or