Strategic work means thinking in options. Having decision options in the future will create value while being stuck with inflexible structures and processes is the beginning of downturn.
Discussing and shaping future decision options leads directly to Real Options. Real Options are the financial model for future actions the management has the right but not the obligation to take. This optional behaviour means that an action or decision is only taken if it creates value, else business is continued as is.

If demand decreases, we’ll have to downgrade a three-shift manufacturing operation to two-shifts. If demand increases, we may add a new highly-automated production line. If one of our suppliers increases prices, we may decide to produce the supply ourselves instead of buying it. How do the probabilities of those and many more scenarios affect the value of our business, i.e. the present value of our future cash flows?

Limitations of DCF
The traditional Discounted Cash Flow (DCF) analysis is not able to capture the value of such future optional business decisions. All we can do is to valuate predefined scenarios, getting a present value for each of them. The value of a couple of predefined scenarios together with a gut-based estimation of the scenarios’ probabilities is not adequate because the real value of flexibility remains unknown. In many cases, DCF significantly undervalues a business project or investment. But we may also encounter a situation where DCF suggests investing in a flexible infrastructure when this flexibility is not actually worth its price.

Real Options
Real Options Analysis (ROA) supplements DCF in such a way that future flexibility is correctly valued. Option theory is known for more than 35 years now, ROA since the end of the 70’s. Academics have published almost uncountable papers on ROA, and ROA has been in use notably in the energy business, at airplane manufacturers and with venture capital companies. The application of ROA was, however, mathematically quite complex and very laborious. Many CFOs were, therefore, afraid of ROA or only used it to valuate relatively simple cases.

Opexar - THE tool
It’s now time to change this thinking. Opexar makes the valuation of even the most complex future business decision scenarios with ROA a simple and quick task. No need for financial mathematics, no need to set up gargantuan Excel sheets. Just enter your expected cash flows and their uncertainty ranges, specify the option structure with a few mouse-clicks, then let Opexar perform both the DCF and the Real Option Analysis of your business project or investment. You can do the ROA upon an arbitrary number of individual or combined cash flows, with an arbitrary number of individual or interdependent options.

The idea of Opexar is to take ROA from the offices of financial analysis rocket stars to the desktop of the rest of us. State-of-the-art valuation has to capture the value of future flexibility. With Opexar you can do it yourself now.

For more information about Opexar, see ...

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Valuing Flexibility