A comprehensive Example :

Calculating Free Cash Flows

Options in Capital Budgeting

Options
add
value
to
capital
budgeting project by being able to
modify the project based on future
developments (that are currently
unknown).
Some common options are :
1. Option to delay a project
2. Options to expand a project
3. Option to abandon a project

Option to delay
Almost every project has a mutually
exclusive alternative waiting and
pursuing at a later time
Its conceivable that a project with a
(-) NPV now may have a (+) NPV if
UNDERTAKEN LATER ON.

Option to Expand
Even if a project is currently
unprofitable, it may be useful to
determine whether the profitability of
the project will change if the
company is ABLE TO EXPAND in the
future

Option to Abandon
It may be necessary to ABANDON the
project before its estimated life due
to
anaccurate
project
analysis
models / cash flow forecast / due to
changes in market conditions