TABLE OF CONTENTS The objective of this tool is to help you quickly assess whether a project has significant real options value. Depending upon the results, you may decide to conduct a detailed real options analysis or just use the traditional tools such as discounted cash flow to make your investment decision. This assessment tool has four steps. Depending on your answers in step 1, you may stop at the end of step 2 or go all way through step 4.
Select the most appropriate answer to each of the following four questions by circling the number in front of it.
Question 1: What is the level of uncertainty related to your estimated payoff?
6 High
3 Low
0 None
Question 2: What is the investment cost in relation to the estimated payoff?
6 About the same
3 Much different but between the pessimistic and optimistic payoff estimates
0 Below the pessimistic or above the optimistic payoff estimate
Question 3: Do you have contingent decisions in your project definition?
6 Many
3 Just a few
0 None
Question 4: Do you have flexibility in changing project direction to maximize its value?
6 High
3 Low
0No
If you circled 0 for any of the questions in step 1, the project does not have any real options value. The investment decision can be made based on results obtained by using discounted cash flow and other traditional methods, and there is no need for detailed real options analysis. You can stop...
