254 Corporate Finance
IN CONCLUSION
Corporate investments are like options. The DCF methodology invariably breaks down while evaluating
investments that can be timed or phased out. But real options analysis is a complement to the DCF approach,
not a substitute. The examples cited in the chapter are simple call and put options. As shown in the case of oil
exploration, for example, some investments are a series of options. These are compound options. That is,
these are options on options. They cannot be treated as simple call or put options. Since compound options
are complex we do not deal with them here. The objective of this chapter was to provide a flavor of real
options theory. Serious readers must refer to advanced books on real options cited in the Bibliography.
REFERENCES AND SUGGESTED READING
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