chapter  19
16 Pages

The Options Approach to Capital Investment

Companies make capital investments in order to create and exploit profit opportunities. Investments in research and development, for example, can lead to patents and new technologies that open up those opportunities. The commercialization of patents and technologies through construction of new plants and expenditures for marketing can allow companies to take advantage of profit opportunities. Somewhat less obviously, companies that shut down money-losing operations are also investing: The payments they make to extract themselves from contractual agreements, such as severance pay for employees, are the initial expenditure. The payoff is the reduction of future losses.