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The real options approach to capital budgeting uses an options-based analysis to evaluate the real (as opposed to the financial) potential of projects. By charting the options as a series of decision points and events, managers can understand the risks and rewards of the projects, and more fully assess their opportunities. This note introduces the real options approach and describes the four main categories: expansion and follow-on options, timing and delay options, abandonment options and options that introduce flexibility into production. The expansion option is discussed in detail, including sample calculations and decision trees.

The president of a small Canadian tour operator of packaged vacations faces foreign exchange risk resulting from a future transaction in which the firm is committing to pay in U.S. dollars where the company's revenues are in Canadian dollars. The thin profit margins require the company to consider different hedging alternatives. The case provides significant information that will allow students to discuss international parity conditions and various hedging strategies within a relatively simple context.

A doctor is preparing for an upcoming meeting of the Ontario Drug Quality and Therapeutics committee. At this meeting the committee would need to make a decision about adding six new drugs to the Ontario formulary. The doctor needed to review the clinical and economic evidence on each drug in order to take a position on each at the meeting. The case introduces students to the concept of formularies and presents six representative cases for class discussion.

The vice-president of a U.S.-based multi-national company must reach a decision regarding a $13 million capital expenditure proposal from the firm's Brazilian division. The proposal is of particular interest because it is considered to be a testcase in the development of a process to evaluate foreign currency-based investment proposals company wide. The vice-president's objective is to establish a process which will measure the relative economic attractiveness of investment proposals worldwide, regardless of the currencies in which these proposals are initially assessed.

This case provides students with an abridged version of the Offering Circular provided to investors for the proposed merger of the Caribbean operations of two international banks. Taking the perspective of an investment advisor, students are asked to evaluate the proposed merger and make a recommendation to the existing shareholders regarding how they should manage this investment going forward (i.e. sell or hold the shares in the new company). Students will discuss several of the issues involved in valuing international companies using somewhat limited data and puts them in the position of assessing the value of the proposal to existing shareholders.

The chief executive officer and the marketing director of Saku Olletehase AS of Estonia must decide on the company's product portfolio plan. Saku enjoyed market leadership in Estonia with its brand Saku Originaal; however, the strength in market share has weakened in recent years due to increasing competition and greater marketing acumen from other domestic producers. While domestic beer sales have fallen, the company has experienced increases in other product lines such as alcoholic long drinks, cider and non-alcoholic beverages, which compliment its existing agreement to sell Pepsi and 7Up. For the last three years, the company has had the exclusive right to resell three well-known international beer brands (Guinness, Kilkenny and Carlsberg) in Estonia. With so many options and finite marketing resources, the company needs to decide where to focus its effort.

Sante Fe Relocation Services was a premium provider of relocation services based in Hong Kong. Founded in 1980, the company had built a reputation as a reliable, high-quality packer and mover of household goods. By 2000, the company also offered a full range of relocation support services including visa and immigration applications, home searching and cultural and language training. Santa Fe relocated expatriates and their families between Asian countries and between Asia and other regions. The company had its own staff and assets in Asia and managed its international operations through a network of partners. In 2005, the chief operating officer faced three key challenges: differentiating and positioning the brand in a crowded and often price-driven market; incorporating an expanded service line under the original brand and gaining market recognition for those additional services; and managing the brand across the Asian region with an effective balance of standardization versus local adaptation.

The associate director of a university campus reviews two opportunities to improve the profitability of the largest food sales generator on the campus. Low profitability prompts an evaluation of the restaurant mix and a decision regarding operational improvements or more restaurant alternatives.

A retail chain specializing in industrial equipment and supplies to commercial contractors is a victim of commercial crime, which has placed the business on the brink of financial collapse. A regional accounting firm has been contracted to investigate the nature of the crimes and make recommendations on what should be done. This case provides students with an introduction to the topics of commercial crime, forensic accounting, bankruptcy and financial statement analysis.

A group of four friends, all married men and in their late 20s, meet for coffee in a major city. One of the men has received a job application from a young woman he considers to be a stellar candidate for his job opening. The discussion turns into a debate about the feasibility of hiring young women for professional and managerial positions, given that they become pregnant and go on maternity leave.

The human resources manager for logistics and supply chain management at BAX China must consider her company's high rate of staff turnover. In her monthly report to the managing director, the turnover had reached 12 per cent in the first eight months of the year. The human resources manager must evaluate the company's current methods of dealing with turnover and consider what additional action should be taken. Logistics was a complex and rapidly growing industry, particularly in mainland China. Many multinational and domestic service providers were entering the marketing and expanding their operations; however, these companies had to respond to complex operational challenges and escalating customer demands. The resulting demand for skilled workers led to high turnover rates across the industry and at all organizational levels, and created margin pressure and other management challenges. The case offers a uniquely Chinese perspective on workforce recruitment, management and retention. The industry and the broader economy were growing rapidly. Skilled workers were in short supply because logistics was a new and developing discipline in the former command economy. Also, in the human resources manager's opinion, cultural attitudes resulted in low loyalty among the workers.

Less than one year after being awarded a contract to develop one of the world's largest offshore petroleum fields, Statoil's future in Iran appeared to be in jeopardy. Statoil was at the center of a corruption investigation that had resulted in the resignations of three of the company's top executives, including its CEO. The issue was alleged bribes paid by Horton Investments, on Statoil's behest, to secure lucrative petroleum development contracts. According to the Iranian government, Statoil used Horton to channel $15 million in secret bribes to unnamed government officials. Statoil's country manager, who had considerable experience in the region and was unaware of the secret deals, is left with the difficult task of trying to salvage the operation and rebuild the social capital he had established between Statoil and its Iranian counterparts.

The head of clinical trials at Solnyx Pharmaceuticals had just been handed the results of a phase II trial of Atoxeril, a hypertension drug. Her task was to interpret these data in preparation for a meeting with her institutional review board and representatives of the Food and Drug Administration. This case introduces a number of concepts related to the analysis of clinical trials including dealing with missing data, ANOVA, regression and sample size calculations. Students will evaluate the design of the phase II clinical trial and interpret the trial results; they will also evaluate the implications of the angioedema incidence and how it might affect the design of a phase III trial.

Accenture has long been seen as a leader in knowledge management, having received awards for many years. Over the years though, islands of knowledge have developed throughout the organization and the delivery infrastructure has become progressively more expensive. In 2004, the global knowledge management lead has been given the mandate to lead a revitalization of knowledge management. This case outlines governance challenges in the global firm, the transition to a new IT infrastructure and the strategic challenges and opportunities facing knowledge management within Accenture.

Two young entrepreneurs have started a tour company at Whistler Resort in British Columbia. Two years into the operation, they face some critical decisions about their service offering. The major issue centres on expansion. They could grow by forging a partnership with a European destination service, by focusing on their current target market, or by expanding beyond premium winter vacations at Whistler. Students will learn lessons about what it takes to offer and maintain a premium level of service.

China National Petroleum Corporation (CNPC) is one of the largest state owned enterprises in China and needs to separate the exploration, refining and marketing resources from the oil field services and supply resources as well as the company's resources devoted to social services. The case describes the issues surrounding the initial public offering of PetroChina, a subsidiary of CNPC, including the international, national and competitive context in which CNPC found itself prior to the IPO, and the strategy needed to ensure that the subsidiary will be viable in an increasingly competitive international oil industry.

In September 2004, four months after Hungary joined the European Union, the strategy group of Matav - Hungary's largest communications company - is working on its mid-term strategic plan. Since being privatized from state ownership in 1993, the company has seen several changes in its strategy, structure and culture. Nearly 15 years later, the company is a fully integrated telecommunications company involved in a broad range of services including fixed line telephony, mobile communications, Internet services, data transmission and outsourcing. The company's latest acquisition of a formerly state run telecommunications company is considered a success, and management believes that international expansion is necessary to realize dynamic growth as its domestic fixed line business is declining. As well, Hungary's mobile market is highly competitive and saturated with 80 per cent of the country having a mobile phone. The management team feels that Matav is at a crossroads with three main options: expansion in Hungary, regional expansion or focusing on organic growth in existing product lines. The team has to consider all of the lines of business in forming a strategy and whether Matav's resources and organization are suitable for a healthy future.

The publisher of an 18-month old, controlled-circulation weekly newspaper, The Londoner, is contemplating the addition of a web-based searchable data base of classified ads for used cars. It would seem to add value to the readership but it does appeal to readers well beyond the original trading area for the weekly, and it also offers some new timing issues for a weekly paper to create a feature with large weekend readership. The issue is whether or not the publisher should add this auto classified feature section and if so, how to market it to the greatest advantage. This case may be used with The Londoner (A), product 9B05A007).

The newly hired head of Strategic Resources Planning and Management at Royal Bank of Canada Investments (RBCI) must develop a dashboard mechanism for strategically assessing and managing RBCI's non-interest expenses, excluding brokerage fees associated with providing value-added service to clients. After a week of analysis, two things became apparent; first, the four major business units within RBCI were operating independently, neither collaborating on projects nor sharing information. Second, most of the non-interest expenses spent was related to information technology projects. Consider that RBCI was spending nearly $700,000 per day on service delivery, the senior management team was extremely eager to see what the head of Strategic Resources Planning and Management would propose. This case presents information technology portfolio management challenges facing large organizations, and challenges students to develop performance metrics that will be useful at the most senior levels of the organization.

Majestica Hotels Inc., a leading European operator of luxury hotels, was trying to reach an agreement with Commercial Properties of Shanghai regarding the management contract for a new hotel in Shanghai. A series of issues require resolution for the deal to proceed, including length of contract term, name, staffing and many other control issues. Majestica was reluctant to make further concessions for fear that doing so might jeopardize its service culture, arguably the key success factor in this industry. At issue was whether Majestica should adopt a contingency approach and relax its operating philosophy, or stick to its principles, even if it meant not entering a lucrative market.