You're Brought in to Consult on a Project for Object

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The Answer is Real options fall into four categories: options to defer investment, options to change operations, options to abandon projects, and to make follow-on investments. Many examples of real options might be included in this steel project. The following list gives one example from each category of real option. The option to defer investment. The firm may consider postponing the project until it has more information about the costs and benefits of the project. For example, the company may learn that the plant will be less profitable then expected. Suppose that during the next year costly environmental regulations are enacted, or the price of steel goes down. The company should take these considerations into account when deciding if now is the best time to build the plant. The option to change operations. The company must consider whether it will have the flexibility to change the way the plant is operated. For example, if the demand for steel falls, it might be able shut down the plant temporarily and reduce costs. Alternatively, it might be able to produce other metals, such as bronze or brass, if it becomes more profitable to do so. The option to abandon the project. The company should consider what it might be able to do with the project if it fails or it becomes unprofitable to continue. It might decide to construct the facility in such a way that it can accommodate other manufactures in the event it has to liquidate the plant. The option to make follow-on investments. The firm should consider whether any follow-on investments may spring from this project. For example, it might consider whether it can expand the plant to increase production if demand for steel is high. It might also consider whether the new production process might be retrofitted to its existing plants, if the project is successful.

You're Brought in to Consult on a Project for Object

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