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Principles of Corporate Finance – A Tale of Value Week 6 The valuation of a real investment project – analyzing Prev Home
undertake a project. Real options build on net present
value in situations where uncertainty exists and, for
Lectures
example: (i) when the decision does not have to be
Reading made on a now or never basis, but can be delayed, (ii)
when a decision can be changed once it has been made,
Assignments or (iii) when there are opportunities to exploit in the
Discussion Prompt:
future contingent on an initial project being undertaken.
Open Question 6 Therefore, where an organisation has some flexibility in
5 min the decision that has been, or is going to be made, an
option exists for the organisation to alter its decision at
Quiz: Final Test
a future date and this choice has a value.With
14 questions
conventional NPV, risks and uncertainties related to the
Peer-graded project are accounted for in the cost of capital, through
Assignment: The attaching probabilities to discrete outcomes and/or
valuation of a real conducting sensitivity analysis or stress tests. Options,
investment project – on the other hand, view risks and uncertainties as
analyzing inputs,
opportunities, where upside outcomes can be exploited,
scenarios, sensitivity, and
but the organisation has the option to disregard any
timing
Grading in progress downside impact.Real options methodology takes into
account the time available before a decision has to be
Review Your Peers: The made and the risks and uncertainties attached to a
valuation of a real project. It uses these factors to estimate an additional
investment project –
value that can be attributable to the project.Estimating
analyzing inputs,
scenarios, sensitivity, and the value of real optionsAlthough there are numerous
timing types of real options, in Advanced Financial
Management, candidates are only expected to explain
and compute an estimate of the value attributable to
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