Investment Opportunities as Real Options: Getting Started on the Numbers

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Synopsis
In this article, Timothy A. Luehrman presents a framework that can bridge the gap between the practicalities of real-world capital projects and the higher mathematics associated with formal option-pricing theory. His step-by-step approach maps out the exact relationship between a project's characteristics and the five variables that determine the value of a simple call option on a share of stock. By going through these steps, executives not regularly steeped in finance can discover value hidden in their projects that their standard discounted cash flow analysis would overlook. The analogy between financial options and corporate investments that create future opportunities is both intuitively appealing and increasingly well accepted. Executives readily see that today's investment in R&D, or in a new marketing program, or even in a multiphased capital expenditure can generate the possibility of new products or markets tomorrow. But for many, the leap from the puts and calls of financial options to actual investment decisions has been difficult and deeply frustrating. The calculations required to value real options have been dauntingly complex, and practical how-to advice on the subject has been scarce and mostly aimed at specialists, preferably with Ph.D.s in finance. Luehrman's methodology is designed to be used by general managers, not technical specialists. It deliberately sacrifices absolute precision in order to generate a number "good enough" to provide executives with valuable insight into their most important and complex investment decisions.
Copyright:
1998

Book Details

Book Quality:
Publisher Quality
Publisher:
Harvard Business Publishing
Date of Addition:
Copyrighted By:
Harvard Business School Publishing - HBR
Adult content:
No
Language:
English
Has Image Descriptions:
No
Categories:
Nonfiction, Business and Finance
Submitted By:
Bookshare Staff
Usage Restrictions:
This is a copyrighted book.

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