Theoretical and Applied Economics
No. 7 / 2007 (512)
Real Options in Capital Budgeting. Pricing the Option to Delay and the Option to Abandon a Project
Academia de Studii Economice, Bucuresti
Abstract. Traditional discounted cash-flows method for assessing projects assumes that investment decision is an irreversible one, which is not correct. Managers can and must reconsider their initial decision as the new information arises during the project life. This is managerial flexibility and it creates strategic value for a project, only if management takes advantage of the opportunities associated with an analyzed project. Real options represent a new approach in capital budgeting, using the theory of pricing financial options for investments in real assets. In this paper, we emphasize the characteristics and valuation methodologies of real options. The objective in the last section is pricing the option to delay and the option to abandon a project in construction materials field.
Contents
Mihail Manoilescu – Inspirational Even when He Is Not Right
Shrinking Bureaucracy
The Estimation of the Cointegration Relationship between the Economic Growth, Investments and Exports. The Romanian Case
Methodological Aspects Regarding the Process of Estimating the Reserve for the Un-cleared Damages
A Transnational Analysis – Two Models: Migration and Employment across Europe. Academic Qualifications and Labor Market Needs
Challenges of the Harmonization Process of the Fiscal Policies at the European Union Level
Techniques of Turnovers’ Evolution and Structure Analysis Using SQL Server 2005
Real Options in Capital Budgeting. Pricing the Option to Delay and the Option to Abandon a Project