Real options
Real options are the value of managerial flexibility in a project — the option to expand, delay, or abandon it — which a static NPV calculation ignores.
See it move
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A project has a static NPV of −€150,000, which looks like a clear reject. It carries an option to expand in year 2, worth €400,000 if demand turns out strong, a 50% chance, and nothing otherwise. The expected option value is 0.50 × €400,000 = €200,000, which added to the static NPV gives −€150,000 + €200,000 = +€50,000 — worth taking once flexibility is counted.
Where it fits
TopicCapital Budgeting & Investment AppraisalAdvancedSubjectCorporate FinanceAdvancedTopicBusiness Valuation & DCFAdvanced