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Essay / Research Paper Abstract
This 8 page paper looks at the way that real options theory may be usefully utilized when undertaking financial management of financial modeling exercises and supports the resulting decision. The paper starts by explaining the concept of real options theory, considers the way it compares to more traditional investment assessment methods and look at the way it may be used in business. The paper then considers the way it may be applied to the students’ decision making processes and the way it has added to learning. The bibliography cites 4 sources.
Page Count:
8 pages (~225 words per page)
File: TS14_TErealoption.doc
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Unformatted sample text from the term paper:
discounters cash flow; these are based on the idea that the value of an investment is assessed based on the cash flow it is expected to produce, discounted to allow
for the time value of money, as seen with the calculation of a net present value for a project. However, while this has the potential to give a valuation based
on logical assumptions, but it is limited and may be argued as falling short of reflecting the real world decision making and investment processes. The models do not allow for
flexibly, it is assumed that there is a passive approach to investment, only calculation the most likely outcome. In the real worlds application of assessments it may be noted that
the way in which projects are optimised will often be with changes made; options being taken up which may impact in the value of the project./investment. This lack of flexibility
on the part of the traditional models requires us to look elsewhere to find an approach that may be more easily able to cope with the proactive approach most managers
and/or investors will take towards their investments. It may be argued that one potential approach is that of real options theory. It may be hypothesised that real options theory may
be seen as a theory more suited to real world applications than the discounted cash flow models due to the approach which allows for the proactive management of an investment
to allow for all potential outcomes. To assess if this hypothesis is correct it is necessary to look at the models, the underlying concepts and the way it can
be applied in the real world to determine if it may be seen as superior to discounted cash flow models as it can allow for managers to take into account
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