Implementing an NPV-Embedded Binomial Tree from an NPV Analysis

Tom Arnold

Chapter Chapter 7 in A Pragmatic Guide to Real Options, 2014, pp 145-166 from Palgrave Macmillan

Abstract: Abstract In the previous two chapters a number of different real options were implemented using net present value or NPV-embedded binomial trees. In chapter 5, a five-year project had cash flows forecasted through a binomial tree, which was then converted into an NPV-embedded binomial tree. There was an initial value for the cash flow that was forecasted forward using the multipliers “U” and “D.” Then mean future cash flows were discounted backward through the tree to produce an NPV calculation at the beginning of the tree.

Keywords: Cash Flow; Real Option; Future Cash Flow; Discount Cash Flow; Binomial Tree (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_7

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DOI: 10.1057/9781137391162_7

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