Chapter “Investing in Assets: Theory of Investment Decision-Making” dealt with the capital budgeting process in which a financial manager accepts a project only if the discounted cash flow of that project exceeds the initial costs of the project. The discount rate is the cost of capital. The difference between the discounted cash flow and the initial cash outlay is the net present value, NPV, which should be positive to accept a project. This chapter discusses another application of cash flow and valuation, the application of real option theory.
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