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Principles of Corporate Finance – A Tale of Value Week 6 The valuation of a real investment project – analyzing Prev Home
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
Lectures
or (iii) when there are opportunities to exploit in the
Reading future contingent on an initial project being undertaken.
Therefore, where an organisation has some flexibility in
Assignments
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
project are accounted for in the cost of capital, through
Quiz: Final Test
attaching probabilities to discrete outcomes and/or
14 questions
conducting sensitivity analysis or stress tests. Options,
Peer-graded on the other hand, view risks and uncertainties as
Assignment: The opportunities, where upside outcomes can be exploited,
valuation of a real but the organisation has the option to disregard any
investment project –
downside impact.Real options methodology takes into
analyzing inputs,
account the time available before a decision has to be
scenarios, sensitivity, and
timing made and the risks and uncertainties attached to a
Grading in progress project. It uses these factors to estimate an additional
value that can be attributable to the project.Estimating
Review Your Peers: The the value of real optionsAlthough there are numerous
valuation of a real
types of real options, in Advanced Financial
investment project –
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