Which type of real option allows a firm to postpone a project until it can gather more information?
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Answer:
A real option is a choice made available to the managers of a company concerning business investment opportunities. It is referred to as “real” because it typically references projects involving a tangible asset instead of a financial instrument. Tangible assets are physical assets such as machinery, land, and buildings, as well as inventory.Real options are choices a company’s management makes to expand, change, or curtail projects based on changing economic, technological, or market conditions. Factoring in real options affects the valuation of potential investments, although commonly used valuations fail to account for potential benefits provided by real options. Using real options value analysis (ROV), managers can estimate the opportunity cost of continuing or abandoning a project and make decisions accordingly.