Such strategic options are known as real options and

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Unformatted text preview: at www.skf.com/knowledge Download free ebooks at bookboon.com 86 Corporate Finance Real options 10. Real options In many investment projects the firm faces one or more options to make strategic changes during its lifetime. A classical example is mining firm's option to suspend extraction of natural resources if the price falls below the extraction costs. Such strategic options are known as real options, and, can significantly increase the value of a project by eliminating unfavourable outcomes. Generally there exist four types of “real options”: 1. 2. 3. 4. The opportunity to expand and make follow-up investments The opportunity to “wait” and invest later The opportunity to shrink or abandon a project The opportunity to vary the mix of the firm’s output or production methods 10.1 Expansion option The option to expand is often imbedded in investment projects. The value of follow-on investments can be significant and in some case even trigger the project to have positive NPV. Examples of options to expand: - Pr...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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