The value of the firm can exceed the market value of the projects currently in place because the firm may have the opportunity to undertake positive net present value projects in the future (e.g., growth options). Earlier investments may have created opportunities to pursue valuable follow-on projects. Management retains the right to exercise only those projects that appear to be profitable at the time of initiation.
Published in Chapter:
Real Options Reasoning as a Tool for Managerial Decision Making
Bernadette Power (University College Cork, Ireland)
Copyright: © 2008
|Pages: 10
DOI: 10.4018/978-1-59904-843-7.ch086
Abstract
An understanding of human decision making is a fundamental step toward the development of effective intelligent decision support systems (Newell & Simon, 1972; Pomerol, 1997). Many methods have been put forth by decision theory to provide us with an understanding of human decision making and to enable individuals to make better decisions such as in utility maximization (Savage, 1954), satisficing (Simon, 1983), statistical and regression analysis, case-based reasoning (Gilboa and Schmeidler, 1995, 2000), game theory (von Neumann & Morgenstern, 1947), decision trees (Yuan & Shaw, 1995), and so forth. This article focuses on a new approach, namely, real options analysis, as a tool for effective decision making by management when faced with uncertainty in its environment.