Luehrman, T. "Investment as Real Options" 1998 article in Harvard Business Review discussed converting analysis of Franklin Chemical's proposed expansion from a traditional NPV methodology to a Staged Real Option methodology. The motivation for the change was to more accurately quantify management's flexibility in deciding whether or not to commitment to the second stage of the expansion based on market factors at the time the second stage could be deployed. The approach Luehrman used to quantify the value of flexibility in the proposed expansion was based on Black Scholes theory. To convert from a traditional NPV valuation, Luehrman broke the project into two stages where the first stage was the initial commercialization of chemical process and the second stage was commercialization of the expansion/enhancement of the process. Luehrman then applied real option methods the second phase to determines its value. A key technique to the methodology was to discount the strike price (second stage investment) at the risk-free rate of capital rather than the corporate MARR. True or False? O True O False
Luehrman, T. "Investment as Real Options" 1998 article in Harvard Business Review discussed converting analysis of Franklin Chemical's proposed expansion from a traditional NPV methodology to a Staged Real Option methodology. The motivation for the change was to more accurately quantify management's flexibility in deciding whether or not to commitment to the second stage of the expansion based on market factors at the time the second stage could be deployed. The approach Luehrman used to quantify the value of flexibility in the proposed expansion was based on Black Scholes theory. To convert from a traditional NPV valuation, Luehrman broke the project into two stages where the first stage was the initial commercialization of chemical process and the second stage was commercialization of the expansion/enhancement of the process. Luehrman then applied real option methods the second phase to determines its value. A key technique to the methodology was to discount the strike price (second stage investment) at the risk-free rate of capital rather than the corporate MARR. True or False? O True O False
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Transcribed Image Text:Luehrman, T. "Investment as Real Options" 1998 article in Harvard Business Review discussed converting analysis of Franklin Chemical's
proposed expansion from a traditional NPV methodology to a Staged Real Option methodology. The motivation for the change was to more
accurately quantify management's flexibility in deciding whether or not to commitment to the second stage of the expansion based on market
factors at the time the second stage could be deployed. The approach Luehrman used to quantify the value of flexibility in the proposed
expansion was based on Black Scholes theory. To convert from a traditional NPV valuation, Luehrman broke the project into two stages where
the first stage was the initial commercialization of chemical process and the second stage was commercialization of the expansion/enhancement
of the process. Luehrman then applied real option methods the second phase to determines its value. A key technique to the methodology was
to discount the strike price (second stage investment) at the risk-free rate of capital rather than the corporate MARR. True or False?
O True
O False
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