Real options

In the previous chapter we discussed the two tools most widely used in project evaluation, net present value (NPV) and internal rate of return (IRR). As we’ll discuss in this chapter, however, NPV typically undervalues projects because it does not account for the value of flexibility. The real options approach does, and therefore enables companies to make better investment decisions. But, as we’ll also discuss, this useful tool can easily be (and often is) misused.

A caveat

The incorporation of real options into the evaluation of investment ...

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