Assignment 1: Budgeting with Real Options
A capital investment project that generates new opportunities is more valuable than one that doesn't. A flexible project, one that

does not commit management to a fixed operating strategy is more valuable than an inflexible one. When a project is flexible or

generates new opportunities for the company, it is said to contain real options.
In this assignment, you are to discuss the budgeting implications of different option strategies and the cost-benefit issues

associated with such decisions.
Why might recognizing a real option raise but not lower a project's net present value (NPV) as found in a traditional analysis? Why

do we tend to underestimate NPV when we ignore the option to abandon? What do you suggest as a cost-effective approach to capital

budgeting analysis when a project contains real options. Write a one-page memo in which you explain the answers to any two of the

three questions. Post your memo in the discussion forum and solicit feedback from your classmates.

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