Timing Option Approaches (Coursework Sample)
Analyze the five approaches to the timing option and determine which approach would be the most viable across the greatest number of situations. Explain your rationale. Collapse \"Real Options Analysis.\" Please respond to the following: Using what you found in the e-Activity , determine if the organization you selected has made a wise investment in the project they are currently undertaking. Explain your rationale.source..
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Timing Option Approaches
In the real option approach, the management has the room for abandoning the project. However, what happens when there is no option of leaving the project? This is where the timing option approaches come in. instead of staying in a “one time or never” situation, the company may use the wait and see approach. Such a time is used to survey the market and when the conditions are favourable, the company implements the project.
The firm benefits from such a delay because it is able to collect vital information regarding risk, thus making better decision when time for investment comes. The timing option strategies are very useful if the market is very competitive and unpredictable (The Timing Option, 2013).
One approach that the managers may use is to wait until the forecasted cash flows are high. When the foreseen cash flows are low, the managers may postpone the investment for a while. The next approach is to consider the net present value (NPV) of the firm. When the NPV is negative, the firm does not invest.
Another timing option approach involves surveying the dividend payment. Any change in the payment on dividend affects the call. When there are no dividends, some caution should be taken before the call is exercised.
There is also the stock price strategy whereby the manager waits until the stock price is zero and finally, the value of property or products being introduced in the area.
Of all these strategies, considering the cash flow of the investment is the most viable one. This is because cash flow of the investment cuts across many projects, even those where delay doesn’t waste resources, for instance a mining project (The Timing Option, 2013).
Collapse “Real Options Analysis”
An example of real options analysis is in the recent project by Apple whereby the firm is trying to enter into the eBook design and manufacturing field. The eBook market is already composed of several players and the entry of Apple is seen as a way of testing waters. Some of the companies already in this field include Kindle and Sony Reader. Apart from that, the market is expecting new entrants in the form of FirstPaper, Papyrus, and Smartphones etc. The company has already faced a challenge in the form of a suit from Microsoft, which claimed it owned the virtue page turn on patent. Although this action may not have affected the strategy of the company, Apple eventually won this lawsuit (Wang et al. 2009).
Apple has several options depending on how this market turns out. If after watching the market for a while the company finds it not prospective, it may exit altogether. This would give it the opportunity to develop and expand its other products. Other than that, Apple may use the experience it will have gained to develop a better eBook that will ...
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