TABLE OF CONTENTS In the last three chapters, the real options analysis (ROA) tool was introduced, along with discussion of how it can be applied for project valuation using different options models. In this chapter, several real world examples are presented to illustrate how ROA can be applied for project valuation. The following simple options are the focus of this chapter:
Option to abandon
Option to expand
Option to contract
Option to choose
Option to wait
Barrier options
For each option example, the six-step process presented in the previous chapter is applied. First, the problem is framed, then the solution is shown in an easily understood step-by-step process, and finally the results are analyzed and the options application discussed. For every option, the discussion focuses on one or two aspects (such as practical issues, input parameter variability, etc.) that are most relevant to that option type. For instance, the option to abandon discussion involves how to solve the options problem for various strike prices. How to calculate the probability of exercising the option, that is, abandoning the project, is also illustrated. In the case of the option to expand, the effect of option life on the option value is shown. Using the option to contract example, the impact of the volatility factor on the option value is highlighted. The discussion on the chooser option, where the best of the available options, including the option to abandon, contract, and expand, is chosen, presents the differences in the...
