Background Note | HBS Case Collection | November 1994 (Revised March 1995)

Capital Projects as Real Options: An Introduction

by Timothy A. Luehrman

Abstract

Introduces a framework for evaluating corporate investment projects as call options. Presumes readers are familiar with basic option pricing and basic capital budgeting rules. Explains the motivation for viewing projects as options; presents a mapping between a capital project and an option; shows how to price the option; and explores the managerial implications of this approach to capital budgeting. Concludes with a discussion of common practical, analytical questions that arise with this methodology.

Keywords: Financial Instruments; Capital Budgeting; Corporate Finance;

Citation:

Luehrman, Timothy A. "Capital Projects as Real Options: An Introduction." Harvard Business School Background Note 295-074, November 1994. (Revised March 1995.)