The Nobel Prize ?winning work by Fischer Black, Myron Scholes, and Robert Merton in 1973 helped solve a complex financial options pricing problem that had perplexed economists since the early 1900s. Although the theory behind the solution is mathematically complex, the now famous Black-Scholes equation is so simple that you need no more than high school math to use it in pricing financial options, once the input parameters are known. Whereas the Nobel Prize ?winning breakthrough laid the groundwork for financial options, it is not widely used to value real options because of its limited applicability and inherent complexity. Over the years, other solutions, including the binomial method, have evolved that offer more universal application and relative ease of use.

In this chapter, we first present the theoretical limitations of applying financial option valuation models to real options and then discuss practical challenges in solving the real options models. Finally, we also offer a six-step process for real options analysis of projects using what we believe is the most effective solution method that is theoretically sound, valid for a wide variety of applications, and easily understood with no need for high-level math.