Valuing Strategic Corporate Investments

1.5 units

This is an applied course in capital budgeting under uncertainty and flexibility. Traditional NPV analysis assumes that corporate investments are now or never and that they are irreversible. However, most corporate projects have a great deal of flexibility in their timing, scale, etc. Our goal is to develop more advanced capital budgeting skills so that students may attack real-world corporate investment decisions in a sophisticated way. More specifically, the objective of the course is to develop an in-depth understanding of real option theory and the associated implementation skills in real-world applications. The theoretical tools include binomial models, the Black-Scholes model, and Monte Carlo simulations. The application topics cover all types of typical real options, cases of leasing, R&D, takeover, market expansion, staged investments, and multiple project uncertainties, ranging from standard European and American options to compound and rainbow options.