45-964 Real Options
6 units, Carnegie Mellon University
Real options analysis is an approach to the management of operational assets that exploits managerial flexibility in decision making and strives to combine it with marketdriven valuation of cash flows. This approach assumes that managers use all the available information when making decisions. It is thus particularly useful when managing projects that involve dynamic and statecontingent choices among alternatives options, especially of a strategic nature. Examples include investing in and developing new products or technology, expandingreducing manufacturing capacity, and suspendingresuming production. The valuation of financial options is the conceptual basis of real options management but this course does not assume prior knowledge of this topic. Real options analysis extends this fundamental marketdriven valuation approach to a much broader spectrum of business applications that feature dynamic decision making. It thus contrasts the standard net present value rule used by static discounted cash flow analysis. The resulting managerial decisions and asset valuations can be very different when real options analysis is used rather than static discounted cash flow analysis. A unique feature of this course is blending marketbased valuation and decision making concepts and techniques within business analytics. This course thus includes essential content for students seeking managerial and consulting careers in a wide range of industries and settings. Applications comprise, but are not limited to, energy, commodities, manufacturing, real estate, pharmaceutical, and high tech enterprises, as well as research and development projects and entrepreneurial endeavors.
Prerequisites: none listed
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