Real options exist when managers have the opportunity, after a project has been implemented, to make operating changes in response to changed conditions that modify the project's cash flows.

Question

Quizplus · Accepted Answer

Real options are the opportunities or possibilities that managers have to modify a project's cash flows in response to changes in the operating environment after the project has been implemented. Real options provide managers with the flexibility to make strategic decisions based on new information or market conditions. Examples of real options include the ability to expand a project, delay it, abandon it or switch from one option to another. Real options are important in capital budgeting since they help managers in evaluating an investment's potential payoffs and risks.

Real Options Exist When Managers Have the Opportunity, After a Project