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| Author: | Dentskevich, P. Salkin, G. |
| Title: | Valuation of real projects using option pricing techniques |
| Journal: | Omega
1991 : APR, VOL. 19:4, p. 207-222 |
| Index terms: | PROJECTS VALUATION PRICING ASSET VALUATION PRICES UNCERTAINTY DECISION TREES |
| Language: | eng |
| Abstract: | The pricing of options on real assets has been widely discussed over the past few years. In the paper it is shown how a simple technique first used by Cox Ross and Rubinstein to value simple stock options can be transformed to aid in the valuation of complex capital budgeting decisions. The methodology of traditional discounted cash flow analysis is extended to account explicitly for the price uncertainty which exists in the real world. The methodology can be likened to a more formal structure for the construction of decision trees, removing the need to specify subjectively the branch probabilities. Finally, it is applied to a hypothetical case of marginal natural resource project. |
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