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While the traditional discounted cash flow analysis produced by the Investment and Business Valuation model is a worthwhile exercise, it fails to consider any potential strategic options that may be associated with the proposal. The Real Option Valuation model provides the means to extend the traditional analysis by quantifying any such options that may be apparent. The model encompasses a suite of option pricing tools to quantify the embedded strategic value for a range of investment and decision making scenarios. Such tools include modified versions of the Black-Scholes Option pricing model to value:
- 1. The option to Delay a project.
- 2. The option to Expand a project.
- 3. The option to Abandon a project.
- Binomial Option pricing model to value options on options and compare scenarios.
- Game Theory model competitive dynamics for entering a market.
The Menu sheet of the Real Option Valuation model provides a short description of each of these tools so that the most appropriate model can be quickly chosen for valuation.
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