It helps to save projects, which will be profitable in the future. This cuts losses and creates profits where they may not have been noticed before. The switching option allows firms to vary output mix of the firms" production methods.
Many firms will incorporate more than one of these options creating greater flexibility and hence option value. "There are a lot of seeds you know are not going to grow up into anything. Our objective is to have a lot of seeds placed" Pam Francis, CEO of Enron.
Real -options analysis rewards flexibility. That's what makes it better than today's standard decision tool "net present value" remarks Coy (2003). He thinks that by "boiling down all the possibilities for the future into a single scenario, NPV doesn't account for the ability of executives to react to new circumstances-for instance, spend a little up front, see how things develop, then either cancel or go full speed ahead.".
Benaroch ad Kaufmanns (2001) use option pricing model (OPM) to assess flexible investment opportunities in light of market uncertainties. For investment opportunities that can be delayed, they found significant value of the ability to wait for future information and thereby avoid potential losses to be absent in the NPV approach.
In general real option analysis is a tool used in market of uncertainty for developing strategic plans and choosing the correct investment decisions. Its flexibility allows it to adjust business plans and adapt those plans as economic conditions change. The advantage of the "wait and see" method allows projects to be reversed, abandoned or expanded as market conditions create uncertainty. The greater the uncertainty and flexibility, the greater the value of management options.
Will real options take root? .
"Thirty years after the debut of the famous Black-Scholes formula, and 26 years after MIT professor Stewart C. Myers coined the term, real options has yet to catch on at most companies.