The real options approach to investment analysis uses an options-based analysis to evaluate the real potential of the projects (as opposed to financial). With the charting options as a series of decision points and events managers can understand the risks and opportunities of projects, and better assess their chances. This note presents the real options approach and describes the four main categories: expansion and follow-on options, timing and delay options, abandonment options and optional … Read more »

The real options approach to investment analysis uses an options-based analysis to evaluate the real potential of the projects (as opposed to financial). With the charting options as a series of decision points and events managers can understand the risks and opportunities of projects, and better assess their chances. This note presents the real options approach and describes the four main categories: expansion and follow-on options, timing and delay options, abandonment options and to introduce flexibility in production. The expansion option is discussed in detail, including sample calculations and decision trees.
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from
Walid Busaba,
Zeigham Khokher,
Jaclyn Grimshaw
8 pages.
Publication Date: Aug 12,, 2005. Prod #: 905N15-PDF-ENG
Introduction to Real Options HBR case solution