Real Options

Question 1

What are real options?

Answer 1

Real options are non-monetary, intangible benefits that arise from a project that are not captured by the NPV calculation

Question 2

What are the types of real options?

Answer 2

1) Follow-on options
2) Abandonment options
3) Timing options
4) Growth options
5) Flexibility options

Question 3

What are FOLLOW-ON options?

Answer 3

The experience and technological developments gained from undertaking the project that can be carried forward into future projects

Question 4

What are ABANDONMENT options?

Answer 4

The value a firm gets from having the option of abandoning the project and gaining some benefit out of it (I.e being able to dispose of machinery used)

Question 5

What are TIMING options?

Answer 5

The benefit gained from having flexibility over the timing of the project. I.e having the right to develop on land over a 5 year period

Question 6

What are the FLEXIBILITY options?

Answer 6

The benefit a company gains from undertaking a project that involves different options for the business.