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The Real Options Attached to an Investment Project

Author

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  • Mihai-Cristian DINICA

    () (The Bucharest Academy of Economic Studies, Romania)

Abstract

The real options capture the importance of the managerial team’s role in creating value through investment projects. The investments in real assets have a set of options that managers can exercise during the period of the project to increase the value of the assets or to limit the eventual losses. This options have their own value.The traditional methods for investment project evaluatioan, based on discounted cash flows, have some major disadvantages: they assume the irreversibility of a decision, do not take into account the interactions between decisions in several periods and treat the investment as pasive. The evaluation using real options undertake this disadvantage. The paper shows the main types of real options, together with their elements and captures the impact of these options on the value of the investment. The main two models used to evaluate real options, the binomial model and Black-Scholes model, are explained and used to compute the value of real options attached to an investment project.

Suggested Citation

  • Mihai-Cristian DINICA, 2011. "The Real Options Attached to an Investment Project," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 14(2), pages 511-518, December.
  • Handle: RePEc:rom:econmn:v:14:y:2011:i:2:p:511-518
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    File URL: http://www.management.ase.ro/reveconomia/2011-2/23.pdf
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    Cited by:

    1. Hegemann, Annika, 2016. "Hemmt die Veräußerungsgewinnbesteuerung unternehmerische Flexibilität?," arqus Discussion Papers in Quantitative Tax Research 203, arqus - Arbeitskreis Quantitative Steuerlehre.

    More about this item

    Keywords

    real options; investment valuation; investment project; managerial flexibility.;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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