Real options are the valuable operational choices available to the owners of projects and of businesses.
For example, the options to expand, contract, defer or abandon the project (or business).
The existence of valuable real options in favour of the owners generally increases the total value of a project or business.
For this reason a real options analysis of a proposal may in some cases result in a decision to proceed with the project, in circumstances where other project evaluation techniques would have led to rejecting the proposal.
However, it is also possible that a proposal may grant real options - perhaps inadvertantly - in favour of other parties.
In such a case, the other parties might in future exercise their real options against the interests of the owners, causing losses to the owners.
Such real options in favour of other parties are liabilities of a project or business, and reduce the total net value of the project or business.
- Project appraisal
- Real options valuation
- Expansion option
- Deferment option
- Contraction option
- Termination option
- Abandonment option