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Background Note
| HBS Case Collection
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1995
(Revised from original version)
Capital Projects as Real Options: An Introduction
by
Timothy A. Luehrman
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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;