Question

Elegance Inc. is a large cosmetics company that made an initial small investment in a start-up company, Peace Planet, which was developing an organic face lotion. This gave Elegance controlling interests in the start-up company. However, Peace Planet soon began to have financial difficulties because of principal-agent problems. As a result, Elegance did not invest in the next stage of development and pulled out of the company. This approach to strategic alliance is referred to as a:

Answer 1

The correct anwer is B. real-options perspective.

Step-by-step explanation:

They are known as Real Options to the possibilities that some projects have to introduce, in the future, modifications in productive investments thus increasing their value. In practice, managers often refer to these options as intangibles.

The classic models of valuation of investment projects based on the discount of cash flows (NPV, IRR), do not incorporate in the project valuation the possibility of introducing modifications, so that the total value of the project is increased. Therefore, the non-consideration of these modification options may undervalue investment projects by not considering aspects that may be strategic for the company and cause it to discard projects that it should undertake.

The existence of Real Options increases the value of an investment project. In this way, the value of the total project can be calculated as the value of the project without the option (NPV) plus the value of the option.