DCF analysis doesn$$t always lead to proper capital budgeting decisions because capital budgeting projects are not $($active$/$passive$/$real$)$ investments like stocks and bonds. Managers can often take positive actions after the investment has been made to alter a project$$s cash flows. These opportunities are real options that offer the right but not the obligation to take some future action. Types of real options include growth $($expansion$),$ abandonment, investment timing, and flexibility $($inputs$/$output$).$ The existence of options can $($increase$/$decrease$/$neutralize$)$ projects$$ expected profitability, $($increase$/$decrease$/$neutralize$)$

their calculated NPVs$,$ and $($increase$/$decrease$/$neutralize$)$ their risk.

This chapter discusses the different types of real options, how to analyze them, and calculate the value of each option. A$($n$)($flexibility$/$abandonment$/$growth$/$timing$)$

option is an investment that creates the opportunity to make other potentially profitable investments that would not otherwise be possible. A$($n$)($flexibility$/$abandonment$/$growth$/$timing$)$ option gives the firm the ability to shut down a project if operating cash flows turn out to be lower than expected. An investment

$($flexibility$/$abandonment$/$growth$/$timing$)$ option gives the firm flexibility as to when to begin a project. Often, if a firm can delay an investment, it can increase a project$$s expected NPV$.$ A$($n$)($flexibility$/$abandonment$/$growth$/$timing$)$ Real Options: Introduction to Real Options

DCF analysis doesn't always lead to proper capital budgeting decisions because capital budgeting projects are not passive $v$ investments like stocks and bonds. Managers can often take positive actions after the investment

has been made to alter a project's cash flows. These opportunities are real options that offer the right but not the obligation to take some future action. Types of real options include growth $($expansion$),$ abandonment,

investment timing, and flexibility $($inputs$/$output$).$ The existence of options can

$|$ projects' expected profitability,

their calculated NPVs$,$ and

their risk.

This chapter discusses the different types of real options, how to analyze them, and calculate the value of each option. A$($n$)$ option is an investment that creates the opportunity to make other potentially

profitable investments that would not otherwise be possible. A$($n

option gives the firm the ability to shut down a project if operating cash flows turn out to be lower than expected. An investment

option gives the firm flexibility as to when to begin a project. Often, if a firm can delay an investment, it can increase a project's expected NPV$.$ A$($n$)$

$-$Select$-$

option gives the firm the ability to alter

operations depending on how conditions change during a project's life. These options can permit the firm to change either the inputs it uses or the output it produces after operations have commenced.option gives the firm the ability to alter operations depending on how conditions change during a project$$s life. These options can permit the firm to change either the inputs it uses or the output it produces after operations have commenced.