Open AccessAssessing the Option to Abandon an Investment Project by the Binomial Options Pricing Model
Author(s) -
Salvador Cruz Rambaud,
Ana María Sánchez Pérez
Publication year - 2016
Publication title -
advances in decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.178
H-Index - 13
eISSN - 2090-3367
pISSN - 2090-3359
DOI - 10.1155/2016/7605909
Subject(s) - binomial options pricing model , computer science , cash flow , net present value , valuation of options , value (mathematics) , investment (military) , discounted cash flow , flexibility (engineering) , terminal value , black–scholes model , complement (music) , operations research , econometrics , actuarial science , economics , finance , statistics , mathematics , microeconomics , operating cash flow , machine learning , law , chemistry , biochemistry , political science , volatility (finance) , production (economics) , complementation , politics , gene , phenotype
Usually, traditional methods for investment project appraisal such as the net present value (hereinafter NPV) do not incorporate in their values the operational flexibility offered by including a real option included in the project. In this paper, real options, and more specifically the option to abandon, are analysed as a complement to cash flow sequence which quantifies the project. In this way, by considering the existing analogy with financial options, a mathematical expression is derived by using the binomial options pricing model. This methodology provides the value of the option to abandon the project within one, two, and in general n periods. Therefore, this paper aims to be a useful tool in determining the value of the option to abandon according to its residual value, thus making easier the control of the uncertainty element within the project
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