Real option

A business may enter courses of action that give it extra freedom of action in the future. Opening up alternative courses of action creates value in the same way that options do. This is option value. For example, a company may launch an unprofitable product because it may put it in a better position to launch another product if and when the market for the second product develops.

This means that a course of action that is apparently unprofitable on a simple NPV basis may be worth pursuing because it allows extra freedom of action. It does not require a knowledge of options to see this. What options theory allows us to do is to actually place a value on this freedom of action. Even where the data to calculate the exact value is of not available, understanding that it is option value better can still provide in insight into how much it might be.

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