A large telecommunication company faces an opportunity to invest in a SuperCom p

Question

A large telecommunication company faces an opportunity to invest in a SuperCom project that will revolutionize the way consumers use telephones, internet and TV. They have used the NPV methods to evaluate the project and the project is determined to have a positive NPV. However, the congress is currently debating the viability and process by which to allocate or auction the airwaves that are crucial to the commercial success of SuperCom. The company's lobbyist in Washington advices that the debate would be resolved within a year. It is also noted that time is of the essence for projects like this. What are the real options that can be created for this project and under what conditions can each real option be useful or executed?

Explanation / Answer

Real option analysis to a project value when it is used for

It is not uncommon for far-sighted project advocates to admit the possibility of unfavourable outcomes before a project begins, and many implementation plans include an exit strategy. This example demonstrates that formally incorporating an exit strategy into analyses can cause project acceptance signals to reverse. It may seem counterintuitive that admitting the possibility of unfavourable outcomes could cause unacceptable projects to become acceptable. The reversal occurs where there is a favourable consequence to an unfavourable outcome, which in this case is the ability to sell the extension for more than the value of holding it. This example also demonstrates that there is value in making capital assets adaptable to other uses where possible.

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