Good managers not only identify and evaluate realoptions in projects—they also structure projects soas to create real options. Suppose a company isconsidering a project to build an electric generating plant. Name some real options that might bebuilt into the project, explain how they could beevaluated, and discuss their effects on the project’sNPV.
Good managers not only identify and evaluate realoptions in projects—they also structure projects soas to create real options. Suppose a company isconsidering a project to build an electric generating plant. Name some real options that might bebuilt into the project, explain how they could beevaluated, and discuss their effects on the project’sNPV.
Chapter11: Capital Budgeting And Risk
Section: Chapter Questions
Problem 7QTD
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Question
Good managers not only identify and evaluate real
options in projects—they also structure projects so
as to create real options. Suppose a company is
considering a project to build an electric generating plant. Name some real options that might be
built into the project, explain how they could be
evaluated, and discuss their effects on the project’s
NPV.
Expert Solution
Step 1
Capital budgeting decisions are the most important decisions for the company as it affects the profitability of the company. So while investing in some project managers often use the real options associated with the project which helps them to maximize the value of the project. Value maximization can be in terms of loss cutting, expansion, and flexibility.
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