How Real Option Disinvestment Flexibility Augments Project Npv
European Journal of Operations Research, Vol. 168, No. 1, 2006
23 Pages Posted: 14 Mar 2004 Last revised: 12 May 2011
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
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