Strategic Myopia and Certainty
Financial theories come to life when they are applied to solving real-life problems. In this chapter, a container port expansion project next to a liquefied natural gas (LNG) regasification plant is considered. The project’s marginal NPVs under different scenarios illustrate a classic capital budgeting stance: an open and shut case for rejection. However, failing to expand opens the business to contractual default, and this has strategic consequences. Hence, when the embedded real options are considered, investing in a “marginal” project may be justifiable, because it allows larger gas payoffs to be secured.
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