That decision must be weighed by each business. 'The other benefit would be investment benefits, including depreciation of the property for tax purposes and, over the longer term, asset appreciation.' There is no one-size-fits-all strategy for purchasing commercial real estate. Why should a business buy? 'To get a greater control over the cost of the real estate component of overhead, as opposed to leasing, where you can be victimized by the market if the lease rolls over when the market is tight and, as a result, you have higher rental costs,' says William Martin, chair of the real estate group in the Denver office at Kutak Rock LLP, a law firm with 400 attorneys and offices around the country. At the same time, for a business, on the upside the potential rewards can be substantial. It's also a venture rife with risk, as buyers, sellers, agents, and renters alike can suffer the consequences of a dip or spike in demand. Although there are many conceptual similarities to financial options, and the association can lead to gaining unique insight, differences in clarity regarding the definition of the underlying variables that determine option value render tools used to accurately assess the value of financial options far less convincing with respect to their “real” counterparts.Every few years, the real estate market suffers through a crash or a correction and underscores a perpetual dilemma for small and mid-sized businesses: Is it better to rent or own commercial property? Buying commercial real estate is a complex undertaking that is difficult even for experts to time right to maximize their investment value, let alone entrepreneurs or business executives whose areas of expertise are in different industries. By doing so, it has been possible to exemplify the complexities which hinder the applicability of this model, thus making it possible to understand why the approach has not gained traction among practitioners, as has been claimed it would. The valuation technique which is elaborated upon is based on the binomial approximation method, using project NPV as base case value. The case study applies an integrated real options approach to assess an autonomous electric vehicle project, currently in development by Apple Inc. Proponents of the real options approach have long argued for the opportunities to gain a more unified understanding of strategic decision making under uncertainty, and bridge the gap between strategic considerations and valuation models. Real options are conceptually positioned at a point of convergence between disciplines, resulting in a challenge to integrate disparate views which may appear irreconcilable. Often times, capital investment decisions are made based on managerial intuition, given the recognized difficulties to accurately assess project value using mainstream tools such as discounted cash flow analysis, particularly in situations characterized by high uncertainty.

To do so, this line of thinking is put into context, by comparison to other relevant theories in the field of strategic management, as well as the existing techniques for project valuation. Through this thesis, the objective is to determine the merits of a real options framework as managerial tool to be used with respect to making investment decisions.

Real options valuation inc