Expanding hospital capacity by developing an observation unit may be an important strategy in congested hospitals. Understanding the principles for evaluating the potential impact and appropriate sizing of an observation unit is important. The objective of this paper is to contrast two approaches to determining observation unit sizing and profitability, real options, and a flow analysis based on Little's Law. Both methods have validity and use similar data sets. The Little's Law approach has the advantage of providing an estimate of appropriate size for the unit and a natural internal consistency check on data. The benefits of an observation unit can depend critically on assumptions regarding backfill patients, and minor changes in data or assumptions can translate into significant changes in annual financial consequences. Using both the real options and the Little's Law approaches provides some internal consistency checks on data and assumptions. Both are sufficiently simple to be easily mastered and conducted. Using these two simple and accessible methods in parallel for computing the size and financial consequences for an observation unit is recommended.