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Decision tree analysis and real options: a reconciliation

✍ Scribed by Vasiliki Makropoulou

Publisher
John Wiley and Sons
Year
2011
Tongue
English
Weight
115 KB
Volume
32
Category
Article
ISSN
0143-6570

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✦ Synopsis

The purpose of this paper is to demonstrate in a simple framework how decision tree analysis (DTA) and real options approach (ROA) yield the same results when markets are complete. The common scepticism regarding DTA has its roots in the incorrect assumption that one can apply the same discount rate to the project cash flows and the value of the investment opportunity when the decision maker has the option to defer investment.

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