Simple Examples

 

To increase the understanding of Real Options Valuation for our potential clients, we offer three simple applied examples. These examples show the logic of Real Options Valuation and contrast it with the logic of traditional capital budgeting techniques.

 

• Investment

We show how the investment decision depends on the value of waiting for further information.

 

• Staged Investment

We show how the Net Present Value (NPV) creates inaccurate information in the case of staged investment. We show that a negative NPV does not necessarily imply that the firm should not invest. And we show that a positive NPV does not necessarily imply that the firm should invest in full capacity.

 

• Disinvestment

We show how the Net Present Value may induce firms to disinvest potentially profitable businesses.