Real Options: Managing Strategic Investment in an Uncertain World
In capital investing, as in life, you always have options. In today's extremely turbulent world, managers recognize how risky the most valuable investment opportunities often are, and how useful a flexible strategy can be. That's why they want to know all their options. Yet many current financial assessment tools fail to identify what investors can do to capitalize on future uncertain events. Martha Amram and Nalin Kulatilaka suggest a smarter new way to think about strategic investments in...
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In capital investing, as in life, you always have options. In today's extremely turbulent world, managers recognize how risky the most valuable investment opportunities often are, and how useful a flexible strategy can be. That's why they want to know all their options. Yet many current financial assessment tools fail to identify what investors can do to capitalize on future uncertain events. Martha Amram and Nalin Kulatilaka suggest a smarter new way to think about strategic investments in terms of real options. By applying options thinking—the concept behind the recent Nobel Prize-winning work on financial options—to the evaluation of nonfinancial assets, this innovative approach brings a financial market discipline to the evaluation of a company's opportunities. Using real options theory, managers can more effectively target crucial opportunities to redeploy, delay, modify, or even abandon capital-intensive projects as events unfold. Corporate executives in finances, investments, and project management should share this book with decision makers in information technology, strategic planning, corporate restructuring, venture capital, and law. Through timely case studies, the authors show managers how to use real options to evaluate investments and create exit strategies in R&D, product design, contracts, and information technology. By linking strategic vision and tactical project decisions, Real Options helps to improve capital investment planning and results.
PrefacePt. IThe Real Options Potential1Ch. 1Introduction3Ch. 2Uncertainty Creates Opportunities13Ch. 3Option Valuation: The Nobel Prize-Winning Breakthrough29Ch. 4From Wall Street to Main Street: Options on Real Assets47Ch. 5Disciplined Strategy63Ch. 6Quick Lessons79Pt. IIThe Real Options Solution Process87Ch. 7The Four-Step Solution Process89Ch. 8Calculating Option Values107Ch. 9Adjusting for Leakage in Value127Pt. IIIA Portfolio of Applications141Ch. 10Valuing a Start-up143Ch. 11Investing in a Start-up149Ch. 12Exploring for Oil155Ch. 13Developing a Drug163Ch. 14Investing in Infrastructure169Ch. 15Valuing Vacant Land175Ch. 16Buying Flexibility181Ch. 17Combining Real and Financial Flexibility187Ch. 18Investing to Preempt Competitors193Ch. 19Writing a License199Pt. IVConclusion205Ch. 20Changing the Questions We Ask207AppendixA Quick Introduction to Discounted Cash Flow and the Estimation of Volatility211Guide to Literature215Notes223References231Index241About the Authors245
