Real Option Tools

Real Options can link strategy to the value of investment opportunities via an Expanded NPV criterion that is better able to support decision making when the environment is uncertain. The value of the portfolio or real options of a company can be estimated bottom-up from the businesses individual growth opportunities, and top-down from a companies stock price.

Download the following models:

- Download the PVGO model. The value of a companies growth options referred to as Present Value of Growth Options (PVGO) can be backed out stock market prices.
The Binomial Real Option Model developed by Cox, Ross and Rubinstein is a useful tool to analyze bottom-up various operating options. The option to abandon, contract and expand capacity, to switch input and/or output factors, may help to hedge the downside risk of an investment or captures some upside potential.