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Real Options

In: Business and Management

Submitted By tinabusiness
Words 2529
Pages 11
Options Theory Applied to Alternative Energy Industry
Christina Clowdus
Bus: 630
March 20, 2012
Dr. Shaw

Introduction
In life, you always have options. It is no different in capital investment. In today's unpredictable business world, managers recognize how risky the most valuable investment opportunities often are, and how useful a flexible strategy can be. That's why they want to know all their options. Yet many current financial assessment tools fail to identify what investors can do to capitalize on future uncertain events. “Managerial flexibility to adapt and revise future decisions in order to capitalize on favorable future opportunities or to limit losses has proven vital to long-term corporate success in an uncertain and changing marketplace” (Brennan, M.J. and E.S. Schwartz 1985, p. 15). Utilizing a real options strategy allows businesses to capture the value of managerial flexibility in adapting decisions in response to unexpected market developments. When used as a conceptual tool, real options allow management to characterize and communicate the strategic value of an investment project (Bjerksund, P. and S. Ekern 1990). Traditional methods (e.g. net present value, discounted cash flow) fail to accurately capture the economic value of investments in an environment of widespread uncertainty and rapid change. Using real options theory, managers can more effectively target crucial opportunities to redeploy, delay, modify, or even abandon capital-intensive projects as events unfold. Perhaps the most current and relevant companies utilizing the real options theories are found in the energy industry, especially in the development of alternative fuels.
Real Options Theory Justified in Alternative Energy Business Planning
Today’s fiercely competitive environment means that every player in the real business world must be pro-active. However, limited...

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