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
International mortgage-backed securities are the mortgage-backed securities that are issued in a country by a non-domestic entity. With limited size of the Indian

Determine about the synergistic effect When two or more companies join together there must be a synergistic effect. Synergy is when 2 + 2 = 5. Net present value of the two comp

Q. Cost of Equity Share Capital? Cost of Equity Share Capital: - The cost of equity is the utmost rate of return that the company should earn on equity financed position of its

What are the pros and cons of commercial paper relative to bank loans for a company seeking short-term financing? Commercial paper is generally a cheaper source of short-term f

a) Distinguish among standard costing and budgetary control.  (b)"Calculation of variances in standard costing is not an end in itself, but a means  to an end" Brief discussion

What is the intuition behind the NPV capital budgeting framework? The NPV framework is a discounted cash flow method. The method compares the present value of all cash inflows

Is it possible for a company with a positive net income and which does not distribute dividends to find itself in suspension of payments?  Yes. A lot of companies which entered

Details on budgetary control process

Financial Management Initial Disclosures During the process of discussion and negotiation with the client with regard to the financial affairs and the manner of operations of the