Lecture%2019%20ch%2022.1%20UBGA%20103%202010

Lecture%2019%20ch%2022.1%20UBGA%20103%202010 - Chapter 22...

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Chapter 22 Real Options
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11- Real Versus Financial Options • Real Option • The right to make a particular business decision, such as a capital investment • A key distinction between real options and financial options is that real options, and the underlying assets on which they are based, are often not traded in competitive markets.
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11- Decision Tree Analysis • Decision Tree • A graphical representation of future decisions and uncertainty resolution
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11- Decision Tree Analysis (cont'd) • Assume Megan is financing part of her MBA education by running a small business. She purchases goods on eBay and resells them at swap meets. Swap meets typically charge her $500 in advance to set up her small booth. Ignoring the cost of the booth, if she goes to every meet, her average profit on the goods that she sells is $1100 per meet.
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11- Decision Tree Analysis (cont'd) • The decision tree showing Megan’s options looks like the one on the following slide. • Because the NPV of setting up a booth is $600, the optimal decision (shown in blue) would be to set up the booth. • $1100 – $500 = $600
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11- Megan’s Choices
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11- Mapping Uncertainties on a Decision Tree • Megan is aware that attendance at swap meets is weather dependent. • In good weather her profits are $1500.
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Lecture%2019%20ch%2022.1%20UBGA%20103%202010 - Chapter 22...

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