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Principles of Corporate Finance – A Tale of Value Week 6 The valuation of a real investment project – analyzing Prev Home
p
made on a now or never basis, but can be delayed, (ii) 0 pts
Lectures when a decision can be changed once it has been made, No
or (iii) when there are opportunities to exploit in the 1 pt
Reading
future contingent on an initial project being undertaken. Yes
Assignments Therefore, where an organisation has some flexibility in
the decision that has been, or is going to be made, an
Discussion Prompt:
option exists for the organisation to alter its decision at
Open Question 6
a future date and this choice has a value.With
5 min
conventional NPV, risks and uncertainties related to the
Quiz: Final Test project are accounted for in the cost of capital, through
14 questions attaching probabilities to discrete outcomes and/or
conducting sensitivity analysis or stress tests. Options,
Peer-graded
on the other hand, view risks and uncertainties as
Assignment: The
valuation of a real opportunities, where upside outcomes can be exploited,
investment project – but the organisation has the option to disregard any
analyzing inputs, downside impact.Real options methodology takes into
scenarios, sensitivity, and account the time available before a decision has to be
timing
made and the risks and uncertainties attached to a
Grading in progress
project. It uses these factors to estimate an additional
Review Your Peers: The value that can be attributable to the project.Estimating
valuation of a real the value of real optionsAlthough there are numerous
investment project – types of real options, in Advanced Financial
analyzing inputs,
Management, candidates are only expected to explain
scenarios, sensitivity, and
and compute an estimate of the value attributable to
timing
three types of real options:(i) The option to delay a
decision to a future date (which is a type of call option)
(ii) The option to abandon a project once it has
commenced if circumstances no longer justify the
continuation of the project (which is a type of put
option), and(iii) The option to exploit follow-on
opportunities which may arise from taking on an initial