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The option to expand a project: its assessment with the binomial options pricing model

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  • Cruz Rambaud, Salvador
  • Sánchez Pérez, Ana María

Abstract

Traditional methods of investment appraisal, like the Net Present Value, are not able to include the value of the operational flexibility of the project. In this paper, real options, and more specifically the option to expand, are assumed to be included in the project information in addition to the expected cash flows. Thus, to calculate the total value of the project, we are going to apply the methodology of the Net Present Value to the different scenarios derived from the existence of the real option to expand. Taking into account the analogy between real and financial options, the value of including an option to expand is explored by using the binomial options pricing model. In this way, estimating the value of the option to expand is a tool which facilitates the control of the uncertainty element implicit in the project.

Suggested Citation

  • Cruz Rambaud, Salvador & Sánchez Pérez, Ana María, 2017. "The option to expand a project: its assessment with the binomial options pricing model," Operations Research Perspectives, Elsevier, vol. 4(C), pages 12-20.
    • Handle: RePEc:eee:oprepe:v:4:y:2017:i:c:p:12-20
    DOI: 10.1016/j.orp.2017.01.001
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    Citations

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    Cited by:

    1. Shungo Sakaki, 2023. "The rationality of adaptive decision-making and the feasibility of optimal growth planning," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-12, December.
    2. Bugrov Olexander & Bugrova Olena, 2020. "Control process development on the ground of project value dynamics laws," Technology audit and production reserves, Socionet;Technology audit and production reserves, vol. 2(4(52)), pages 11-19.
    3. Marek Durica & Danuse Guttenova & Ludovit Pinda & Lucia Svabova, 2018. "Sustainable Value of Investment in Real Estate: Real Options Approach," Sustainability, MDPI, vol. 10(12), pages 1-18, December.
    4. Jorge Tarifa-Fernández & Ana María Sánchez-Pérez & Salvador Cruz-Rambaud, 2019. "Internet of Things and Their Coming Perspectives: A Real Options Approach," Sustainability, MDPI, vol. 11(11), pages 1-15, June.
    5. Salvador Cruz Rambaud & Joaquín López Pascual & Juan Carlos Meléndez Rodríguez, 2021. "Sustainability in the Aerospace Sector, a Transition to Clean Energy: The E 2 -EVM Valuation Model," Sustainability, MDPI, vol. 13(12), pages 1-17, June.

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