# Capital Projects and Real Options

Real options represent a company’s rights to make chronological decisions in a capital project.

Real options increase the NPV of a project because a firm would not rationally exercise an option which lowers value.

**Types of Real Options**

**Evaluating Real Options**

Calculate the project’s NPV without any options. If the project has a positive NPV, then real options will increase its value.

If the project without any options has a negative NPV, then make adjustments based on the value of associated real options. The analyst must determine if the value of the real options is sufficient to create a positive NPV.

Incorporate the use of decision trees or option pricing models to evaluate a capital project.

LESSONS

- CFA Level 2: Corporate Finance Part 1 – Introduction
- Introduction to Capital Structure and Leverage
- Introductory Capital Budgeting Remarks
- Expansion Projects vs. Replacement Projects and Cash Flows
- Impacts of Depreciation Method Choice on Capital Budget Analysis
- Inflation and Capital Budgeting
- Mutually Exclusive Capital Projects with Unequal Lives
- Equivalent Annual Annuity (EAA) Approach
- Least Common Multiple of Lives Approach
- Stand Alone Risk and Capital Projects
- CAPM and a Capital Project’s Discount Rate
- Capital Projects and Real Options
- Common Pitfalls in Capital Budgeting
- Capital Budgeting Alternatives to NPV and IRR Analysis
- Modigliani-Miller and Capital Structure Theory
- Evaluating Capital Structure Policy
- International Differences in Financial Leverage
- Dividend and Share Repurchase Policies
- Factors Affecting Corporate Dividend Policy Decisions
- Signals from Dividend Policies

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