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.
