The Real Power of Real Options
While option-pricing models are a superior valuation tool – the purpose to which the theory is generally put – real options can provide a systematic framework that will also serve as a strategic tool, and that it is in this strategic application that the real power of real options lies.
It is just such a framework that this article seeks to provide. We begin by … [ Read more ]
Content: Article | Authors: Keith Leslie, Max P. Michaels | Source: McKinsey Quarterly | Subject: Finance
Keith J. Leslie, Max P. Michaels
The option valuation recognizes the value of learning. This is important, because strategic decisions are rarely one-time events, particularly in investment-intensive industrial sectors. NPV, which does not properly recognize the value of learning more before a full commitment is made, is for that reason often inadequate. In fact, its inadequacy can be stated in the precise terms of the real-options model. Of the six variables … [ Read more ]
Content: Quotation | Authors: Keith Leslie, Max P. Michaels | Source: McKinsey Quarterly | Subjects: Finance, Management