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Unformatted text preview: It is well suited when deciding whether or not to continue a project or abandon a project after receiving results from initial investment. You can analyze a project over time using this framework whereas traditional NPV analysis is better suited to the analysis of a single-period decision. 2. Explain how a firm may have to change its performance evaluation and compensation formulas for managers if it adopts a “real options” approach. Performance evaluation and compensation must be consistent with the outcomes of real options analysis. One of the potential, and indeed likely, outcomes from a real options analysis is the decision to abandon a project. You do not want to penalize a manager for making a decision to abandon a project. Some performance measures may be tied to short-run profitability and assets under management as measured by some growth statistic. The performance measures must be consistent with the decision to abandon an investment....
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This note was uploaded on 09/13/2011 for the course FIN 6301 taught by Professor El-asmawanti during the Fall '09 term at University of Texas at Dallas, Richardson.
- Fall '09