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Principles of Corporate Finance – A Tale of Value Week 6 The valuation of a real investment project – analyzing Prev Home

Real options’ valuation methodology adds to the The NPV of building all 5 plants immediately has been
Lectures conventional net present value (NPV) estimations by found.
taking account of real life flexibility and choice. This is
Reading 0 pts
the first of two articles which considers how real options
No
Assignments can be incorporated into investment appraisal decisions.
This article discusses real options and then considers 1 pt
Discussion Prompt: Yes
the types of real options calculations which may be
Open Question 6
encountered in Advanced Financial Management,
5 min
through three examples. The article then considers the
The sequential development valuation model has been
Quiz: Final Test limitations of the application of real options in practice
built.
14 questions and how some of these may be mitigated.The second
article considers a more complex scenario and examines 0 pts
Peer-graded No
how the results produced from using real options with
Assignment: The
valuation of a real NPV valuations can be used by managers when making 2 pts
investment project – strategic decisions.Net present value (NPV) and real Yes
analyzing inputs, optionsThe conventional NPV method assumes that a
scenarios, sensitivity, and project commences immediately and proceeds until it
timing The NPV of a sequential project has been calculated.
finishes, as originally predicted. Therefore it assumes
Grading in progress
that a decision has to be made on a now or never basis, 0 pts
Review Your Peers: The and once made, it cannot be changed. It does not No
valuation of a real recognise that most investment appraisal decisions are
investment project – 1 pt
flexible and give managers a choice of what actions to
analyzing inputs, Yes
undertake.The real options method estimates a value
scenarios, sensitivity, and
for this flexibility and choice, which is present when
timing
managers are making a decision on whether or not to Clear comments have been provided.
undertake a project. Real options build on net present
value in situations where uncertainty exists and, for 0 pts
example: (i) when the decision does not have to be No
made on a now or never basis, but can be delayed, (ii) 1 pt
when a decision can be changed once it has been made, Yes
or (iii) when there are opportunities to exploit in the