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A mathematical approach to the deferment option of an investment project
Author(s) -
Cruz Rambaud Salvador,
Sánchez Pérez Ana María
Publication year - 2019
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.3035
Subject(s) - flexibility (engineering) , investment (military) , value (mathematics) , expression (computer science) , computer science , operations research , binomial (polynomial) , binomial options pricing model , option value , risk analysis (engineering) , actuarial science , mathematical optimization , economics , econometrics , business , microeconomics , mathematics , valuation of options , statistics , management , politics , political science , law , machine learning , incentive , programming language
This paper presents a model to calculate the value of the real option to defer an investment project within one, two, and in general n periods. The methodology used to deduce the mathematical expression of this option is based on the binomial model by constructing all possible future scenarios as well as their associated probabilities. Consequently, this manuscript provides the expression to assess the operative flexibility of a project when its deferment is possible. Indeed, this is an easy‐to‐handle and reliable tool that allows more accurate forecasts to reduce the uncertainty around a project then facilitating the managerial decision‐making processes.