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Project Valuation Using Real Options

Book Description

Business leaders are frequently faced with investment decisions on new and ongoing projects. The challenge lies in deciding what projects to choose, expand, contract, defer, or abandon, and which method of valuation to use is the key tool in the process. This title presents a step-by-step, practical approach to real options valuation to make it easily understandable by practitioners as well as senior management. This systematic approach to project valuation helps you minimize upfront investment risks, exercise flexibility in decision making, and maximize the returns.

Whereas the traditional decision tools such as discounted cash flow/net present value (DCF/NPV) analysis assume a “fixed” path ahead, real options analysis offers more flexible strategies. Considered one of the greatest innovations of modern finance, the real options approach is based on Nobel-prize winning work by three MIT economists, Fischer Black, Robert Merton, and Myron Scholes.

Key Features
  • Shows you how to achieve strategic alignment of projects, increase project flexibility and sustain competitive advantage
  • Explains why traditional valuation methods such as DCF/NPV and decision tree analyses are no longer effective in today’s uncertain world
  • Walks you through each step of using real options to value projects regardless of the reader’s beginning financial knowledge and helps the practitioner communicate the results to the senior management
  • Presents multiple scenarios and examples that show the true value of using real options as well as the challenges, pitfalls and success stories of this valuation technique
  • Illustrates the usefulness of real options to value purchases of special features in capital equipment, temporarily shutting down and restarting equipment, selecting ingredients of a product or service, changing the product mix, and much more