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Investment opportunities as real options

Keywords: Investment opportunities , Financial option , Real option , Net present value , Flexibility , Risk , Uncertainty

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Abstract:

Opportunity (optional) approach to capital investment appraisal represents, completely new theoretical and methodological framework for investment analysis. Compared to traditional, discount cash flow (DCF) model of analysis, the optional approach provides opportunity for valuation and managing flexibility, i.e. possibility of approaching (amending the previous decisions) in compliance with market changes. Risk and uncertainty are inevitably following the capital investment. Therefore, the importance of optional approach to investments is also that it provides possible better “treatment” of risks in the investment analysis, and also more rational allocation of resources, accordingly. This approach should be of more interest to the Countries in transition, considering the limited financial sources as well as risk and uncertainty are emphasized.

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