How Real Option Disinvestment Flexibility Augments Project Npv

European Journal of Operations Research, Vol. 168, No. 1, 2006

Cass Business School Research Paper

23 Pages Posted: 14 Mar 2004 Last revised: 12 May 2011

See all articles by Aneel Keswani

Aneel Keswani

Faculty of Finance, Cass Business School, City University, London

Mark B. Shackleton

Lancaster University - Department of Accounting and Finance

Abstract

In this article we show how a project's option value increases with incremental levels of investment and dis-investment flexibility. We do this by presenting two NPV and seven option pricing models in a strict sequence of increasing flexibility. We illustrate each with numerical examples and determine the maximum value that a project option could ever support. We show that managerial consideration of exit options at the time of project initiation can add value.

Keywords: Financial education, decision analysis, real options, project valuation with disinvestment

Suggested Citation

Keswani, Aneel and Shackleton, Mark B., How Real Option Disinvestment Flexibility Augments Project Npv. European Journal of Operations Research, Vol. 168, No. 1, 2006, Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=516124

Aneel Keswani

Faculty of Finance, Cass Business School, City University, London ( email )

106 Bunhill Row
London EC1Y 8TZ
Great Britain
+44 207 040 8763 (Phone)

Mark B. Shackleton (Contact Author)

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
44 1524 594131 (Phone)
44 1524 847321 (Fax)

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