Decision tree analysis and real options: a reconciliation |
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| Authors: | Vasiliki Makropoulou |
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| Institution: | Department of Management Science and Technology, Athens University of Economics and Business, Athens, Greece |
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| Abstract: | 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. Copyright © 2011 John Wiley & Sons, Ltd. |
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