Real option

Real options include delaying an investment, expanding successful operations, switching or redeploying resources and abandoning a weak project. The business must actually possess the relevant flexibility; merely imagining a future choice does not establish an option. A basic NPV assuming a fixed course can omit value from contingent decisions. Option models can help estimate that flexibility, but require credible inputs for underlying project value, exercise cost, timing and risk, and must avoid double-counting flexibility already in cash flows. Competition and operational constraints can reduce the value.