Real Options in Capital Investment: Models, Strategies, and Applications

Real Options in Capital Investment: Models, Strategies, and Applications

Real Options in Capital Investment: Models, Strategies, and Applications

Real Options in Capital Investment: Models, Strategies, and Applications

Synopsis

This compilation integrates various new contributions to the growing "real options" literature. Recent developments in the valuation of capital investment opportunities seen as real options (e.g. to defer, expand, abandon, or switch) have provided the tools and unlocked the possibilities to revolutionize the field of capital budgeting. The resulting insights, strategies, and techniques enable quantifying the thus far elusive elements of managerial operating flexibility and strategic interactions. These are vital to successfully capitalize on favorable future investment opportunities or limit losses from adverse market developments. This book presents various models and operating strategies, and a variety of applications ranging from acquisitions and divestitures, to natural resource development and pollution compliance. It is intended for both the academic and the professional market.

Excerpt

This edited book integrates various new contributions to the growing "real options" literature. Similar to options on financial securities, real options involve discretionary decisions or rights, with no obligations, to acquire or exchange an asset for a specified alternative price. The valuation of real options (such as to defer, expand, contract, abandon, switch, or otherwise alter a capital investment), by providing a means to properly account for managerial flexibility and strategic considerations, has revolutionized corporate investment decision making.

A corporation's value creation and competitive position are critically determined by resource allocation and the proper evaluation of investment alternatives. At the international level, American companies have been steadily losing their competitive position relative to their Japanese and German counterparts, despite their use of more "powerful" quantitative techniques such as discounted cash flow (DCF) analysis, in recent decades. Growing numbers of practicing managers and academics are becoming convinced that the standard approaches to corporate resource allocation have failed because they cannot properly capture managerial flexibility to adapt and revise later decisions in response to unexpected market developments. In a constantly changing and always uncertain world marketplace, managerial operating flexibility and strategic adaptability have become vital in order to successfully capitalize on favorable future investment opportunities and limit losses from adverse market developments.

The field of capital budgeting admittedly remained stagnant for several decades until recent developments in real options provided the tools and unlocked the possibilities to revolutionize the field. The insights and techniques derived from option pricing are capable of quantifying the elusive elements of managerial operating flexibility and strategic interactions, which have thus far been ignored or underestimated by conventional net present value (NPV) and other quantitative approaches.

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.