| The theory of real options, which represents one of the up-to-date research achievements of modern financial development, is the application of the financial options to the enterprises' investment decisions. As an expansion of the NPV method used fundamentally in the traditional investment decisions, it provides the investment practices with a new analytical tool and enjoys a bright future. Presently, the domestic research of real options is quite rare and primitive so that this paper is based mainly on the overseas academic research and achievements. However, Limited to the capability of the author, it is just a simple exploration of the theory of real options and its application to the enterprises' investment decisions. The author's aim is to provide insight into the future deeper research of real options.This paper is divided into three chapters and nine sections.The first chapter deals with the fundamental ideas of real options.Since real options derive from financial options, the basic ideas of financial options are essential to the understanding of real options. Therefore, the first section begins with the introduction of the concept and fundamental knowledge of options. Options, also called option rights, are the rights that have property of asymmetric rights and obligations. They could be classified as call options, put options, American options, European options, financial options, real options and so on according to different benchmarks. Besides, in this section certain basic ideas concerning options including the expiration date, exercise price, moneyness, the inner value and time value, the asymmetry of options' payoffs as well as the Black-Scholes equation are introduced respectively.Based on the above knowledge, section two focuses on explaining the concept of real options as well as their relationships both with financial options and NPV. Firstly, real options are contingent decisions with flexibility. They are the right, but not the obligation, to take actions at specified cost at specified time. Compared with real options, traditional investment decisions, which are identified as" invest now or never", are mechanical ways without flexibility. Secondly, similar with financial options, the valuation of real options is decided by six parameters, whose effects to the value of real options can be see by making a simply sensitive analysis. Since the theory of real options come from the theory of financial options, based on the comparison of the realoptions and financial options, this paper points out that real options are the combination of the financial options theory and the NPV method. Therefore, in the last part of the paper, a simple comparison of real option approach and NPV approach is made, and the flexibility, which exists in the real investment decisions but is neglected by the NPV approach, is specified.Section three illuminates how to identify the relationship of the NPV and real options, pointing out that real option approach is rather a better method in investment decisions based on the NPV approach than a complete substitute for the NPV method. The differences of the value of them lies in that the deferred decision will bring out twokinds of extra values------the time value and the value of the better coming results whenwaiting. In fact, investment decisions based on real options are two-dimension decisions, which have six future possibilities rather than two possibilities of the one-dimension decisions made according to NPV approach because the flexibility embedded in real options is valuable.Based on a supposed case, Section four addresses the basic types of real options such as deferred options, expanded options, contracted options, abandon options, switch options and so on. Section five concerns the real applications of real options.For simplicity, the analysis of the valuation of real options and the comparison of the NPV and real options mentioned above are supposed to be carried out in terms ofthe simple financial pricing method------the Black-sch...
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