Question

Name three types of real options available to managers with regard to projects and briefly describe them in a sentence or two:

Answer 1

Firstly, I would define Real options: Real options are a right but not an obligation to make a big decision. The concept of a real option is crucial to the success of a business as the ability to choose the right business opportunity.

The most common types of options are:

1. Option to expand- It is the option to make an investment or undertake a project in the future to expand the business operations eg: A fast food chain considers opening a new restaurant.

2. Option to abandon- This is the option to cease a project or an asset to realize its salvage value (like; a manufacturer can opt to sell old equipment)

3. Option to wait-This is the option of deferring the business decision to future ( a fast food chain considers opening a new restaurant this year or in next year)