Lecture 11

Question 1

What are real options?

Answer 1

• When to Invest in a new project
• Whether to postpone a follow-up part of a project
• Whether/When to abandon an existing project

*arise when companies face a decision that can wait

Question 2

What are the key features of real options?

Answer 2

• Decision is irreversible (or costly to reverse)
• Flexibility about timing of investment
• Uncertainty about future states (the states could be price, or demand, or other things that affect firms’ cash flows)