Real Options

John B. Guerard and Eli Schwartz
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John B. Guerard: McKinley Capital Management, Inc.
Eli Schwartz: Lehigh University

Chapter Chapter 17 in Quantitative Corporate Finance, 2007, pp 415-424 from Springer

Abstract: Abstract Chapter 11 dealt with the capital budgeting process in which a financial manager accepts a project only if the discounted cash flow of that project exceeds the initial costs of the project. The discount rate is the cost of capital. The difference between the discounted cash flow and the initial cash outlay is the net present value, NPV, which should be positive to accept a project. This chapter discusses another application of cash flow and valuation, the application of real option theory, where the initial investment is the equivalent of the call price for the later project’s return. Real option theory is especially applicable for investment in research and development.

Date: 2007
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DOI: 10.1007/978-0-387-34465-2_17

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