Final Project

Keesha Coaxum

Use of Real Option Theory in Financial Management

Ashford University

BUS650: Managerial Finance

Instructor Cain

January 13, 2013

In business, as in comparison to life, you find yourself deciding on options or making decisions that can affect your live and the lives of others financially. In today's unstable market, managers realize how incredibly risky some investment opportunities can be and how useful a flexible strategy can become implemented. Using real options theory, managers can effectively analyze opportunities to pursue, delay, modify, or abandon projects as events unfold like in today’s economy with the fiscal cliff.

This paper analyzes the use of real option theory in financial   management and modeling. It discusses issues included in the implementation of the theory in financial management and modeling. It explains new  learning  in  real  option  theory  and a case study that was able to apply the theory along with the application of the theory to my former employment which has  helped me understand real option theory.

Use of Real Options Theory in Financial Management/Modeling

The Real Option Theory has struck some interest with managers in the last couple of decades. Back in the day, companies had plenty of time to make decisions to make changes when they felt it was necessary. Now, if they take their time deciding on changes, chances are by the time they finally make a decision, another company has already made the move. Times have

changed with how the economy is today; the old saying, “It’s a Dog Eat Dog World”, and in this competitive market, you have to make moves quickly and strategically to survive as a company. The Real Option Theory has helped gather concepts from financial economics and use them to make better decisions.

The Real Option theory is different from other theories as it shows the combined importance of uncertainty and managerial discretion in a company which gives a broad view of a company’s...