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Advanced Valuation Skills - Real options analysis (ROA)

Real options is the term used to denote the explicit valuation of the opportunities associated with changing decisions in response to the resolution of relevant uncertainty.

All projects can be seen as real options, where the cash flows can be received for the price of the initial investment or ongoing costs.

Stewart Myers of the Sloan School of Management at MIT coined the term "real options" to address the gap between strategic planning and finance. Strategic planning needs finance. Present value calculations are needed as a check on strategic analysis and vice versa.  However, standard discounted cash flow techniques will tend to understate the option value attached to growing profitable lines of business. Some commentators even consider strategy to be a portfolio of real options.

Modules include:

  • Real option analysis (ROA) definitions
  • Usefulness of ROA
  • ROA adoption over time
  • Mapping project scenarios
    • Mapping of option inputs on to project variables
    • Real option archetypes
      • Deferral
      • Abandonment
      • Scale
      • Scope
      • Timing
      • Switching
      • Multiple interacting
      • Compound
      • Rainbow
  • Uncovering embedded real options
  • Estimating annualised project volatility

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