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Increasing Cash Flow using a Real Options Model

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Companies often have to increase their investment costs to obtain real options. Why might this be so, and how could a firm decide if it was worth the cost to obtain a given real option?

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Solution Summary

The cited solution gives a good explanation of the consequences in using a real options model to assess the effectiveness of a project in total before it begins. Three situations where this model could be effective are listed and explained. This solution is 165 words.

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The real options model has certain advantages over NPV calculation or a discounted cash flow analysis. Those approaches usually are designed to assess the effectiveness of a project in total before it begins. Once started, those models have little or no impact on the progress of an investment option. ...

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