| Course | BUS 552 Innovative Finance and Venture Capital |
|---|---|
| Module | Module 5 |
| Paper type | Real options analysis |
| Length | About 1,035 words, 6 pages |
| Format | APA 7 student paper |
| School | Aspen University |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for BUS 552 Module 5
A Pilot That Loses Money and Is Still Worth Building: Real Options in a Phased Lithium Brine Project
Student Name
MBA Program, Aspen University
BUS 552: Innovative Finance and Venture Capital
Instructor Name
Month Day, Year
A Pilot That Loses Money and Is Still Worth Building: Real Options in a Phased Lithium Brine Project
Great Basin Lithium, a composite company in Nevada, holds claims over an underground brine aquifer containing dissolved lithium, a key material in batteries. It proposes to develop the resource in two phases. The first is a $25 million pilot plant that would test a direct extraction technology and produce modest quantities of lithium carbonate for three years. The second, if pursued, would be a $180 million commercial plant built after the pilot. Venture investors are being asked to fund the pilot. Their analysts initially concluded that it should be rejected. This paper explains why that conclusion may be wrong.
The Static View
Taken by itself, the pilot is expected to generate cash flows worth about $22 million in present value, against a cost of $25 million, for a net present value of minus $3 million at the company's 10% discount rate. The pilot is not designed to be profitable on its own; it is designed to prove the technology and the brine's chemistry.
A standard analysis might add the commercial plant to the plan. Whether that plant is valuable depends on lithium prices in three years, which have swung widely in recent years with battery demand. The company's analysts estimate a 45% chance that prices will be high, in which case the commercial plant's cash flows would be worth $260 million at the time of the decision, and a 55% chance that prices will be low, in which case they would be worth $120 million. Committing now to build the plant in either case gives an expected value at year three of $183 million against a cost of $180 million, or $3 million, worth about $2 million today. The total for both phases, committed now, is slightly below zero.
Growth Opportunities as Options
Myers (1977) observed that much of a firm's value can consist of growth opportunities, investments it may choose to make in the future, and that these are best understood as options: the firm can invest if conditions are favorable and decline if they are not. Their value comes from the ability to wait for information and act on it. The static analysis treated the commercial plant as a commitment. In reality, Great Basin will decide after the pilot, when it knows both how well the technology works and what lithium sells for.
Valuing the Option to Expand
If Great Basin builds the commercial plant only when prices are high, the payoffs at year three are:
The expected payoff at year three is 0.45 times $80 million, or $36 million. Discounted three years at 10%, the option to expand is worth about $27 million today. Adding this to the pilot's own value of minus $3 million gives a strategic value of about $24 million. The pilot, which loses money on its own, is worth building because it purchases a valuable option.
| Scenario | Probability | Value of commercial plant | Cost | Decision | Payoff |
|---|---|---|---|---|---|
| High lithium prices | 45% | $260 million | $180 million | Build | $80 million |
| Low lithium prices | 55% | $120 million | $180 million | Do not build | $0 |
Other Options in the Project
Trigeorgis (1996) cataloged the main kinds of real options: to defer investment, to stage it, to expand, to contract, to abandon and to switch inputs or outputs. Great Basin's project contains several. The pilot itself stages the investment. If the technology fails, the company can abandon the project, selling equipment and claims for some salvage value. If prices are moderate, it could build a smaller commercial plant, an option to contract. Each adds value that a static analysis would ignore, though the estimate above values only the expansion.
Using Options Thinking Well
Amram and Kulatilaka (1999) argued that real options analysis is most useful as a discipline for decisions: it links strategy to market information, such as commodity prices and their volatility, and encourages managers to design projects that create and preserve valuable options. They also warned that options must be specified concretely, with identifiable decisions and triggers, if the analysis is to be credible. For Great Basin, that means stating in advance the lithium price and technical results that would trigger expansion.
The Value of Abandoning Early
The pilot also contains an option to stop. If, a year in, the extraction technology recovers far less lithium than expected, Great Basin can halt the pilot, sell its equipment and keep or sell its claims. That option limits the downside of the pilot itself: instead of losing most of the $25 million, the company might lose $14 million and recover the rest. A full analysis would value this abandonment option alongside the expansion option; including it would raise the strategic value further. The analysts left it out to keep the estimate conservative and to focus investors on the decision that matters most.
Limits of the Analysis
The scenario valuation simplifies a continuous range of prices into two outcomes, and the probabilities rest on analysts' judgment about a volatile market. A formal option pricing model would require estimating the volatility of the commercial plant's value, which is itself difficult. The option's value also depends on Great Basin keeping its claims, permits and water rights in place during the pilot, which carries costs. None of this overturns the result, yet the $27 million should be read as an estimate with a wide range.
What Investors Should Ask
Investors in the pilot should ask what decisions will be made at the end of it and on what evidence, whether the company will retain the rights needed to expand, and how the expansion would be financed. They should also negotiate rights to participate in financing the commercial plant, since the pilot investors bear the risk that creates the option and should share in its exercise.
Conclusion
The static analysis rejected the pilot because it ignored the decision that would follow. Recognizing the commercial plant as an option, to be exercised only if prices and technology justify it, reveals a strategic value of about $24 million. Real options thinking, used carefully and with concrete triggers, turns a money-losing pilot into a sound way to buy information and the right to act on it.
References
Amram, M., & Kulatilaka, N. (1999). Disciplined decisions: Aligning strategy with the financial markets. Harvard Business Review, 77(1), 95-104.
Myers, S. C. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5(2), 147-175. https://doi.org/10.1016/0304-405X(77)90015-0
Trigeorgis, L. (1996). Real options: Managerial flexibility and strategy in resource allocation. MIT Press.
What the BUS 552 Module 5 instructions ask for
The Aspen catalog includes real options among the advanced tools of BUS 552, and here students show what the freedom to act later adds beyond an ordinary net present value. A single two-phase project is valued below. Describe the project and the decisions that can be made later. Compute the standard net present value of committing now. Identify the real options, such as the option to expand, delay or abandon, and the information that will arrive before they are exercised. Value at least one option with scenarios, a decision tree or a formal model. Compare the strategic value with the static value. Explain how managers and investors should use the result, including its limits.
How the BUS 552 Module 5 example is put together
The paper opens with Great Basin Lithium's claims and its two-phase plan. The pilot's cash flows are worth $22 million against a $25 million cost, a static net present value of minus $3 million. Committing to the expansion today, with lithium prices in three years uncertain, adds roughly $2 million in expected value, still leaving the whole plan slightly negative. Myers's Journal of Financial Economics article introduced the idea of growth opportunities as real options. A scenario table values the expansion as an option exercised only if prices are high: a 45% chance of a $260 million project worth $80 million more than its cost, discounted three years, gives about $27 million. Trigeorgis's Real Options lists options to defer, stage, expand, contract, abandon and switch. Amram and Kulatilaka's Harvard Business Review article supports using options thinking to design projects, and the conclusion advises investors.
Where the marks sit in the BUS 552 Module 5 rubric
Graders of a real options paper look for an honest static baseline, accurate identification of the options in a project, a sound valuation method and an honest discussion of limits. This example computes the static value first, so the grader can see exactly what the options add. The expansion option is valued with clear scenarios, probabilities and discounting, and the logic of exercising only in favorable states is spelled out. Myers's Journal of Financial Economics article grounds the concept, Trigeorgis's book supplies the taxonomy of options and Amram and Kulatilaka's Harvard Business Review article connects the analysis to strategy and to market data. The discussion of limits, such as the difficulty of estimating volatility for a commodity project, shows that the student treats real options as disciplined reasoning, not a device to justify any project.
BUS 552 Module 5 help: mistakes that cost marks
Students sometimes use real options to justify projects that fail every other test, adding a large option value without showing where it comes from. Identify the specific decision, the information that will arrive and the conditions under which the option will be exercised. Another error is double counting: if the static analysis already assumes expansion, the option to expand cannot be added again. Discount option payoffs from the decision date to today. State probabilities and their basis. Consider costs of keeping options alive, such as holding leases or permits. Discuss limits honestly, including uncertainty in inputs. Finally, translate the analysis into design: real options thinking is most useful when it changes how a project is structured, for example by staging investment.
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BUS 552 Module 5 questions, answered
What does BUS 552 Module 5 usually ask for?
Aspen's BUS 552 covers real options in this module, so analyzing how flexibility, such as the option to expand, delay or abandon, changes a project's value is typical. Check your classroom prompt.
What is a real option?
The right, but not the obligation, to take a business action in the future, such as expanding or abandoning a project, which has value when outcomes are uncertain.
Why can a project with a negative net present value be worth doing?
Because it may create options, such as the chance to expand if conditions turn out well, whose value is not captured in a static analysis.
Where can I find a free BUS 552 Module 5 sample paper?
The full analysis appears above: a lithium brine pilot with a negative static value that becomes worth building once the option to expand is valued with scenarios.
What types of real options are there?
Common types include options to defer, stage, expand, contract, abandon or switch inputs or outputs, as cataloged by Trigeorgis.