Real Options (99 Edition)

In capital investing, as in life, you always have options. In today's extremely turbulent world, managers recognize how risky the most valuable investment opportunities often are, and how useful a flexible strategy can be. That's why they want to know all their options. Yet many current financial assessment tools fail to identify what investors can do to capitalize on future uncertain events. Martha Amram and Nalin Kulatilaka suggest a smarter new way to think about strategic investments in terms of real options. By applying options thinking--the concept behind the recent Nobel Prize-winning work on financial options--to the evaluation of nonfinancial assets, this innovative approach brings a financial market discipline to the evaluation of a company's opportunities. Using real options theory, managers can more effectively target crucial opportunities to redeploy, delay, modify, or even abandon capital-intensive projects as events unfold. Corporate executives in finances, investments, and project management should share this book with decision makers in information technology, strategic planning, corporate restructuring, venture capital, and law. Through timely case studies, the authors show managers how to use real options to evaluate investments and create exit strategies in R&D, product design, contracts, and information technology. By linking strategic vision and tactical project decisions, Real Options helps to improve capital investment planning and results.

Martha Amram is the president of Glaze Creek Partners, a consulting firm in Palo Alto, California. She frequently speaks to senior management groups and has substantial experience in the use of the real options approach for the development of business strategy. Nalin Kulatilaka is a professor of finance at Boston University's School of Management, where he teaches primarily at the Executive MBA level. He has published widely on real options, risk management, and international finance, and has addressed executive audiences throughout the world on these topics.

Preface

PART I: The Real Options Potential

1. Introduction

2. Uncertainty Creates Opportunities

3. Option Valuation: The Nobel Prize - Winning Breakthrough

4. From Wall Street to Main Street: Options on Real Assets

5. Disciplined Strategy

6. Quick Lessons

Part II: The Real Options Solution Process

7. The Four-Step Solution Process

8. Calculating Option Values

9. Adjusting for Leakage in Value

Part III: A Portfolio of Applications

10. Valuing a Start-up

11. Investing in a Start-up

12. Exploring for Oil

13. Developing a Drug

14. Investing in Infrastructure

15. Valuing Vacant Land

16. Buying Flexibility

17. Combining Real and Financial Flexibility

18. Investing to Preempt Competitors

19. Writing a License

Part IV: Conclusion

20. Changing the Questions We Ask

Appendix: A Quick Introduction to Discounted Cash Flow and the Estimation of Volatility

Guide to Literature

Notes

References

Index

About the Authors