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Real Options in Capital Budgeting. Pricing the Option to Delay and the Option to Abandon a Project

Author

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  • Nicoleta Vintila

    (Academy of Economic Studies, Bucharest)

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.

Suggested Citation

  • Nicoleta Vintila, 2007. "Real Options in Capital Budgeting. Pricing the Option to Delay and the Option to Abandon a Project," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 7(7(512)), pages 47-58, July.
    • Handle: RePEc:agr:journl:v:7(512):y:2007:i:7(512):p:47-58
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    Citations

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    Cited by:

    1. Andrejs Čirjevskis, 2021. "Measuring Synergies of Banks’ Cross-Border Mergers by Real Options: Case Study of Luminor Group AB," JRFM, MDPI, vol. 14(9), pages 1-20, August.
    2. Andrejs Čirjevskis, 2024. "Exploring the Usefulness of Real Options Theory for Foreign Affiliate Divestments: Real Abandonment Options’ Applications," JRFM, MDPI, vol. 17(10), pages 1-17, September.
    3. Nemanja Jalić & Črtomir Rozman & Željko Vaško & Karmen Pažek, 2022. "Determining the Extent of Economical Sustainability of a Case Study Milk Farm in Bosnia and Herzegovina Based on the Real Options Model," Sustainability, MDPI, vol. 14(19), pages 1-14, September.

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