Real-world real options: a powerful decision technology tool for managing risk and flexibility in capital investment projects

Traditional methods of capital investment project evaluation do not provide the flexibility for strategic decision making on new business ventures. However, real options tools encourage proactive strategic management and, when used properly, can significantly improve decision making in regard to capital investments. Historical perspective on the use of real options is presented and a summary of available tools for invoking this approach. Three examples of real-life capital-intensive high-risk new business ventures in the Architecture, Engineering, Construction (AEC) and Real Estate Development industries are chosen to show how real options can be used to more accurately determine the value of flexibility on projects.