Set up,

Analysis, and

Examination of the sensitivity of the results to the assumptions made

Set Up Phase: Definition of the Scope of Assessment

The number of different uses of project and the range of uncertainties to be considered is identified. Defining the nature of the flexibility and the available options for real projects is more difficult than it is for financial options, whose flexibility is specified upfront by a contract. Research programs, new production facilities and product platforms can each lead to many different kinds of final developments, and are certainly neither limited nor specified by contract.

The managerial decision points in the development process are also important for proper valuation of the project. Managerial reviews embody the flexibility in the investment, the opportunity to abandon or modify a project. Specifically, the valuation process must identify the opportunities to change the development of a project.

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