Real Options (Valuation Part2)

Question 1

Real Options

Answer 1

• Flexibility in real investment project often takes on the form of an option

Vorraussetzungen:

• News will possibly arrive in the future
• When it arrives, the news may affect decisions

Question 2

Timing Option

Answer 2

Option to delay investment

• Most Valuable when there is a great deal of uncertainty (Volatilität)
• Benefits of waiting
• Cost of Waiting

Question 3

Growth Option

Answer 3

• Open up future Growth Opportunities

Question 4

Time to Build Option (Staged Investment)

Answer 4

• Project involves several investment stages, it entails the option to invest in the next stage if information is favorable and stop investing otherweise

Question 5

Abandoment Option

Answer 5

Shut down current Operations

• Can add value to a project because firm can drop unsuccessful projects

Question 6

Option to Alter Operating scale (Expand or Contract)

Answer 6

• Expand if information is favorable
• Contract if information is unfavorable

Question 7

Option to switch

Answer 7

• firm can change the output mix to switch the product or the process