Sensitivity Analysis of a Real Options Problem
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Authors
Lewis, Neal
Eschenbach, Ted
Hartman, Joseph
Issue Date
2007
Type
Article
Language
en_US
Keywords
Engineering , Industrial engineering , Real options , Present worth , Sensitivity analysis , Engineering management
Alternative Title
Abstract
The existing literature describes how financial option techniques can be applied for determining a project option value. However, input variables are assumed to be fixed and known over the project’s horizon. While this assumption may be accurate for short term financial options lasting a few weeks, it is rarely true for real options that last for years. An example problem is analyzed using both present worth and using real deferral options. Sensitivity analysis is conducted on both methods, showing how initial estimates and real world variability over the life of the project can impact the results of the valuation techniques.
Description
Citation
Publisher
Institute of Industrial Engineers