§ 01
| Real Option Type | Management Action | Example |
|---|---|---|
| Option to delay | Wait for better information | Mining company waiting for commodity prices |
| Option to expand | Scale up if successful | Startup pilot program before full rollout |
| Option to contract | Scale down if demand falls | Flexible manufacturing capacity |
| Option to abandon | Exit and recover salvage value | R&D project with stage gates |
§ 02
DCF typically undervalues projects with high uncertainty and significant managerial flexibility. The option to abandon a failing project or expand a successful one has real economic value that traditional NPV ignores.
§ 03
Think of a company making a major investment (new market entry, R&D pipeline, capacity expansion). What real options does management have? Can they delay? Scale up/down? Abandon?
§ 04
A pharma company’s DCF shows a drug pipeline worth $500M. But each drug can be abandoned at each clinical trial stage if results are bad. Does this change the value?
§ 05
§ 06
Real Options: a company has an option to expand capacity if demand materializes. Standard DCF says 'the expansion NPV = $0 today.' Does the option have value?
Five questions · AI feedback
Sit with the ideas.
A mining company owns rights to a copper deposit. At current copper prices, developing the mine has an NPV of -$50M. The rights expire in 10 years. Copper price volatility is 25% annually. A standard DCF analyst would say the deposit is worthless. What would a real options analyst say?
Why: