Real Option
Candlefocus EditorReal options provide managers with the ability to weigh the risks and rewards associated with an investment opportunity more accurately, which prevent them from taking nightmarish business decisions like overinvesting in an uncertain project or missed out on a lucrative one. Real options are based on the idea that companies can benefit from the synergies that exist between making targeted investments and offering potential payouts by not investing at all. To put it simply, if a managerial team finds that the risk/reward ratio regarding a certain investment is not satisfactory, they can opt out of the investment in favor of other options.
In terms of the actual options that real assets offer, investing in tangible assets can give managers the right to expand, wait and see, or abandon a project altogether depending on the results of the initial investment. Finding the right approach and opportunity in terms of particular asset investments is a crucial part of the process, but what makes real options so attractive is that there are a range of economic values associated with them. Ultimately, whether the decision is to go ahead or change directions, real assets have the potential to provide personnel with a high return on their investments.
Moreover, real options allow managers to adjust their investments during the course of the project. For instance, if the original framework was not in line with expectations or the conditions altered during the process, firms can benefit from changing the direction of their decisions by changing the scope of their investments. Furthermore, such decisions can also lead to potential financial benefit through the reduced costs of operation. This ultimately leads to a high rate of return on the original investment and more flexibility in decision making.
To sum up, real options provide firms and organizations with a valuable way to make decisions regarding tangible investments and projects. Real options offer the agility to adjust investment parameters in order to ensure maximum returns on investments and minimize risks that may be associated with the venture. Economic values and the potential to benefit from not investing, as well as the right to expand, wait, and abandon projects all help business owners and managers make optimum decisions for their firms.