ABSTRACT
This chapter examines how valuable investment and financing flexibilities are with respect to undertaking growth opportunities. It presents a brief survey of operating and financing options. The chapter illustrates a discrete-time valuation analysis with a hypothetical case of a hydroelectric power investment project in an emerging market. In the example, the government is eager to attract and promote private investment. Private investors recognize the growth opportunities available and are willing to participate. However, both sides would wish to know what strategies could be designed to finance this project. The chapter adopts the binomial model, which provides an intuitive and tractable analysis. Many capital projects usually require many years to develop and complete. Investment decisions and cash outlays occur sequentially. The investment program is thus a contingent claim and becomes productive only after the entire sequence is completed.
