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  3. Real Options: Evaluating Corporate Investment Opportunities in a Dynamic World

Real Options: Evaluating Corporate Investment Opportunities in a Dynamic World, 1st edition

  • Sydney Howell
  • Andrew Stark
  • David Newton
  • Dean Paxson
  • Mustafa Cavus
  • Jose Pereira

Published by FT Press (August 7th 2001) - Copyright © 2002

1st edition

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Overview

 What is the correct price to pay for a brand?  When should you cease operating an asset?  What should the maximum investment in a research project be?  How much should you buy or sell technology or a licence for     Real option analysis enables us to integrate our decisions on investment, operations and disinvestment, and is altering economics, strategy, psychology and other disciplines. It follows the understanding that at least one of the value-determining variables is evolving unforecastably, following a random walk, but there will be flexibility in how we respond as that uncertainty unfolds.  Real option analysis is a development from the methods by which financial markets value an option on a stock or share. It helps us decide how much money we should spend to acquire an economic opportunity and when we should commit ourselves to one of the available decisions. Real option analysis is increasingly being used by companies to value intangible assets. However, due to the mathematical complexity of analyzing real options, they are only now becoming essential to corporate strategy. Real Options will provide the reader with a comprehensive understanding of the concepts behind real option analysis and how to use them. It demystifies the scientific aura surrounding the subject, giving the reader the understanding necessary to direct or apply real options analysis in any organizational setting. Real Options will:

    • introduce real options, what they are, why they are important and when to use them
    • explain the essential concepts of real and financial options analysis
    • illustrate how to apply financial option concepts to real options
    • explain how to build and solve real option models
    • highlight the limitations and pitfalls of real option analysis
    • provide foresight into the future of real option analysis
    • provide worked practical examples and case studies from the world of real estate, sport management, power generation and operations.
     Written by a team of authors from (and linked) to Manchester Business School who have experience in teaching practitioners and students alike in the field of real options, this book will guide the reader from a basic level through to more advanced analysis. Real Options will prove essential reading for finance practitioners, finance consultants, MBA and finance students, and general managers.


    Table of contents

    1. Introduction to real options and analysis
    2. Essential option concepts
    3. Applying financial option concepts to real options
    4. Some modelling techniques for tackling and solving real options problems
    5. Real football options in Manchester
    6. Valuing a power plant under uncertainty
    7. Two case studies on real estate development
    8. DixPin Biotech Plc - a simple example of a binary option
    9. Real urban development options at Canary Wharf
    10. Options embedded in house mortgages: A valuation with two random walk factors
    11. Some further real options topics
    12. The pitfalls of real options analysis and how to avoid them
    13.The future of real options analysis.
    14. Summary
    Appendices
     

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