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The value of flexibility, the option value, is always positive or zero and it increases when there is more risk, because of the ability to avoid unfavorable circumstances or to take advantage of favorable opportunities.

The hybrid real options method of valuation thus inevitably increases the perceived and actual value of prospective projects and products, once flexibility has been introduced into the design or the development process. This is a great plus for managers seeking to justify financing for their projects.

Sensitivity Phase: Assessment of importance of key assumptions

Since the results obtained from any analysis always have many underlying assumptions, evaluation process always incorporates a sensitivity analysis. Their implications have to be tested. A key assumption of any option analysis is that the past statistical record is a good guide to future performance. This is frequently but not necessarily so. The result would not be blind-sided by over reliance on speculative assumptions and instead subject their analyses to various scenarios to test their results.

Conclusion

Managers and designers for technological systems face a common difficulty: new projects or products are inherently risky. Consequently, solid methods for valuing prospective investments is to be found out to justify development strategies.

It is crucial to find out practical and dynamic strategies of development, and manage risk consciously. This is done most effectively by developing options that can exploit or abandon depending on future events. It is useful to combine the best of the alternative approaches to valuing risky projects, to achieve a practical and effective means of valuation.

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* Contributed by -
Jyoti Singh,
PGDBM 2006,
IMT, Ghaziabad.