An opportunity cost model to value deferral options

Gyutai Kim, Luke Miller and Jung Woo Baek

The Engineering Economist, 2024, vol. 69, issue 2, 88-107

Abstract: This study discusses a real options valuation approach based on the familiar opportunity cost concept. After demonstrating the equivalence of the opportunity model to the binomial lattice approach of Cox, Ross, and Rubinstein (CRR), we discuss its attributes through simple numerical examples. In contrast to the CRR approach, the transparency of the opportunity model provides an intuitive and economical baseline for managerial discussions and decision-making. We focus on the opportunity costs inherently embedded in the real options value (ROV); therefore, our study is distinct from most other studies, which consider them as the exogenous input to the ROV.

Date: 2024
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DOI: 10.1080/0013791X.2024.2340030

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