How Can a Value Be Assigned to a Real Option

question 38

Essay

How can a value be assigned to a real option when we never know if it will be of any use when it has to be paid for? What kind of a number is the value assigned to a real option and how is it derived in capital budgeting? Is an assigned value always a true estimate or is it a limit, i.e. a minimum or a maximum? Why?

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Definitions:

Frames

Conceptual structures used in communication to help individuals organize their perceptions and understandings of a situation.

Legal Power

The authority vested by law in an entity or individual to make decisions, enforce rules, or control resources.

Mediator

An impartial individual who facilitates communication and negotiation between disputing parties to help them reach a voluntary agreement.

Two-Party Negotiation

A process where two parties discuss their differences and attempt to reach an agreement or solution.