Assignment: Budgeting with Real Options
A capital investment project that generates new opportunities is more valuable than one that doesn't. A flexible project, one that does not commit management to a fixed operating strategy is more valuable than an inflexible one. When a project is flexible or generates new opportunities for the company, it is said to contain real options.
In this assignment, you are to discuss the budgeting implications of different option strategies and the cost-benefit issues associated with such decisions.
• Why might recognizing a real option raise but not lower a project's net present value (NPV) as found in a traditional analysis?
• Why do we tend to underestimate NPV when we ignore the option to abandon?
• What do you suggest as a cost-effective approach to capital budgeting analysis when a project contains real options.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also include a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also Include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.