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Why are real options important in capital budgeting?
One assumption of capital budgeting is that if a project is accepted it will continue without any consideration of actual cash flows. Real options play a vital role for managers in this area. The managers have options through which they can adjust projects according to the changing trends of the market.
What does it mean to have real options?
Real options play a vital role for managers in this area. The managers have options through which they can adjust projects according to the changing trends of the market. These options are often referred to as real options, managerial options or strategic options.
Which is the best method for valuing real options?
The most common technique for valuing and analyzing real options is to apply the Black-Scholes model for call and put options (Brach, 2003). The management of the company can diversify the capital spending structure by applying any one of the real options in various scenarios.
Last Update: Oct 2021
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