Applying More Real Options Analysis into an NPV-Embedded Binomial Tree

Tom Arnold

Chapter Chapter 6 in A Pragmatic Guide to Real Options, 2014, pp 117-143 from Palgrave Macmillan

Abstract: Abstract In the previous chapter, real options that allowed for the discontinuation of a project prior to its completion were shown to add value to it. In fact, a project that was initially viewed as being not viable (i.e., net present value [NPV] was negative) became potentially viable (i.e., NPV was positive) when the real options were considered. The real options analysis was implemented using riskadjusted, pricing and certainty equivalence for valuation purposes. However, risk-neutral pricing would have significantly reduced the computations within the analysis.

Keywords: Cash Flow; Real Option; Excess Capacity; Previous Chapter; Future Cash Flow (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-137-39116-2_6

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DOI: 10.1057/9781137391162_6

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