Real Options Examples

As we noted in the introductory section, three types of options are embedded in investments—the option to expand, delay, and abandon an investment. In this section, we will consider each of these options and how they add value to an investment, as well as potential implications for valuation.

The Option to Delay an Investment

Investments typically are analyzed based on their expected cash flows and discount rates at the time of the analysis. The net present value computed on that basis is a measure of its value and acceptability at that time. The rule that emerges is a simple one: negative net present value investments destroy value and should not be accepted. Expected cash flows and discount rates change over time, however, ...

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