1 Risk and Flexibility Integration in Valuation Copyright © 2020 John Wiley & Sons, Incorporated All rights reserved 1.1 Introduction The investment must be identified as an entry fee that provides access to future opportunities Thus, the value of a project is not limited to the present value of anticipated cash flows, but must capture all the growth opportunities that will arise in the future For this, real options offer a long-term vision They have the advantage of incorporating future upside and downside cash flow opportunities through volatility representing the risk and, consequently, make it possible to incorporate the notion of flexibility into project management In fact, depending on the cash flows, the project can, among other things, be carried, abandoned, strengthened or developed in sequence Volatility is the key parameter of options, whether financial or real Its usefulness lies in the fact that the value of derivative financial products or investment projects depends on the possibility of benefiting from favorable conditions or, otherwise, reducing losses In practice, real options remain less used than the NPV criterion for determining the value of a project However, Graham and Harvey’s (2001) and Hartmann and Hassan’s (2006) studies indicate that about a quarter of Chief Financial Officers (CFOs) surveyed use the real options approach to help them make investment decisions Black and Scholes (1973), on the one hand, and Cox, Ross and Rubinstein (1979) models, on the other hand, form a basis for the valuation of investment projects by real options Initially intended to enhance the value of financial options, these models are particularly relevant to evaluate a project taking into account a range of opportunities characterizing it Investment Decision-making Using Optional Models, First Edition David Heller Investment Decision-Making Using Optional Models, edited by David Heller, John Wiley & Sons, Incorporated, 2020 ProQuest © ISTE Ltd 2019 Published by ISTE Ltd and John Wiley & Sons, Inc Ebook Central, http://ebookcentral.proquest.com/lib/rmit/detail.action?docID=6001224 Created from rmit on 2022-02-09 09:59:47