PV of project's FCF = S = stock price
project assets = X = strike price
length of time the decision may be deferred
Real Options
= t = time to expiration
time value of money = Rf = risk-free rate
riskiness of project assets = stdev = stdev of
returns
Option to time the investment
= right to postpone
Option to expand
= right to grow
Real Options in Investments
Option to quit a project
= abandon
Option to replace one project with another
= replacement option
Important for large capital intensive projects
Option to quit a project I. Opt
projects involving new products where
= put option
Inves
acceptance is uncertain
Options as a Concept of
ermporary-Stop or Shutdown Options
T
Decision Making
= right to temporary reduce production
Intensity or Operating Scale Options
= right to change production time or rate
Option to Expand
Real Option types
= call option
Option to Contract
= put option
, Stage 1: implement in a few locations
Stage 2: use locations and redesign
workflows
invest in stages
Stage 3: full implementation
this reduces the uncertainty Investing in Infrastructure
Pilot projects with abandoning/delaying
options can overcome objections by
management
payoff is in terms of future projects
firms that invest a lot in R&D
expenditure may end up as sunk cost
amount spent on the R&D is the
cost of the call option
real option application
projects/products that might emerge from
r esearch provide the payoffs on the options
Real L
Research expenditures should provide much
higher value for firms that are in volatile
technologies or businesses
implications
he value of research and the optimal
T
amount to be spent on research will change
over time as businesses mature
"R&D is always an option"
TRUE OR FALSE
project assets = X = strike price
length of time the decision may be deferred
Real Options
= t = time to expiration
time value of money = Rf = risk-free rate
riskiness of project assets = stdev = stdev of
returns
Option to time the investment
= right to postpone
Option to expand
= right to grow
Real Options in Investments
Option to quit a project
= abandon
Option to replace one project with another
= replacement option
Important for large capital intensive projects
Option to quit a project I. Opt
projects involving new products where
= put option
Inves
acceptance is uncertain
Options as a Concept of
ermporary-Stop or Shutdown Options
T
Decision Making
= right to temporary reduce production
Intensity or Operating Scale Options
= right to change production time or rate
Option to Expand
Real Option types
= call option
Option to Contract
= put option
, Stage 1: implement in a few locations
Stage 2: use locations and redesign
workflows
invest in stages
Stage 3: full implementation
this reduces the uncertainty Investing in Infrastructure
Pilot projects with abandoning/delaying
options can overcome objections by
management
payoff is in terms of future projects
firms that invest a lot in R&D
expenditure may end up as sunk cost
amount spent on the R&D is the
cost of the call option
real option application
projects/products that might emerge from
r esearch provide the payoffs on the options
Real L
Research expenditures should provide much
higher value for firms that are in volatile
technologies or businesses
implications
he value of research and the optimal
T
amount to be spent on research will change
over time as businesses mature
"R&D is always an option"
TRUE OR FALSE
