Buacc3701: financial management traditional project
Valuing real options requires considering two factors: the option’s cost and its potential payoff. The cost is determined by looking at the sunk costs required to make certain decisions – such as those related to researching new projects or technologies – while the potential payoffs are based on how much additional value will be gained from making these decisions. Additionally, other variables such as market conditions and risk tolerance must also be taken into account in order to calculate an accurate value for a given firm’s real options.
Overall, understanding how real options work and how they are valued can help businesses make more informed decisions about investing their resources into uncertain projects with potentially high rewards but also some inherent risks involved.