The firm may have the option to cease a project during its life. This option is known as an abandonment or termination option. It is the right to sell the cash flows over the remainder of the project’s life for some salvage value.
Published in Chapter:
Real Options Reasoning as a Tool for Managerial Decision Making
Bernadette Power (University College Cork, Ireland)
Copyright: © 2008
|Pages: 10
DOI: 10.4018/978-1-59904-843-7.ch086
Abstract
An understanding of human decision making is a fundamental step toward the development of effective intelligent decision support systems (Newell & Simon, 1972; Pomerol, 1997). Many methods have been put forth by decision theory to provide us with an understanding of human decision making and to enable individuals to make better decisions such as in utility maximization (Savage, 1954), satisficing (Simon, 1983), statistical and regression analysis, case-based reasoning (Gilboa and Schmeidler, 1995, 2000), game theory (von Neumann & Morgenstern, 1947), decision trees (Yuan & Shaw, 1995), and so forth. This article focuses on a new approach, namely, real options analysis, as a tool for effective decision making by management when faced with uncertainty in its environment.