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The Real Options Attached to an Investment Project

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Author(s): Mihai-Cristian DINICĂ

Journal: Economia : Seria Management
ISSN 1454-0320

Volume: 14;
Issue: 2;
Start page: 511;
Date: 2011;
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Keywords: real options | investment valuation | investment project | managerial flexibility

ABSTRACT
The real options capture the importance of the managerial team’s role in creating value through investment projects. The investments in real assets have a set of options that managers can exercise during the period of the project to increase the value of the assets or to limit the eventual losses. This options have their own value.The traditional methods for investment project evaluatioan, based on discounted cash flows, have some major disadvantages: they assume the irreversibility of a decision, do not take into account the interactions between decisions in several periods and treat the investment as pasive. The evaluation using real options undertake this disadvantage. The paper shows the main types of real options, together with their elements and captures the impact of these options on the value of the investment. The main two models used to evaluate real options, the binomial model and Black-Scholes model, are explained and used to compute the value of real options attached to an investment project.
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