A business firm is one of many organizations that converts inputs into outputs. The overall goal of this endeavor is to add value. In Chapter 11, we examined the role of labor and compensation schemes in the attainment of this end. In this chapter, the role of capital in this process is investigated. Capital expenditures often represent significant outlays of an enterprise's financial resources. It is also the case that capital inputs have useful lives extending beyond the current budget year. Therefore, capital expenditures made today not only represent initial current year spending, but they also represent future spending and future revenues. This has led to the use of capital budgeting to make decisions regarding the use of capital. Yet, for several reasons, this traditional approach leaves a lot to be desired. A new, more flexible approach needs to be used to examine the role of capital resources in the firm. It is in this light that the concept of real options is developed. The real options approach recognizes that changing capital resources is a sequential process and that the contribution of capital to the goal of adding value needs to be considered in more than the "now or never" context of traditional capital budgeting. The use of real options by managers is the focus of this chapter.