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Making Decisions Sequential

In: A Pragmatic Guide to Real Options

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  • Tom Arnold

Abstract

As stated in chapter 1, net present value (NPV) decisions are made “technically” without any consideration of reevaluation in the future. The outflows and inflows are discounted, and the NPV is computed with an NPV greater than or equal to zero implying that the project is viable. The main focus of chapter 1 was that a single discount rate for all of the cash flows through time was not consistent with reality. Cash flows received later in time should have higher discount rates than cash flows received sooner in time. This chapter will focus on viewing projects as a series of sequential decisions rather than a single initial decision. To illustrate the concept, consider a game in which you pay $1.00 to roll two six-sided dice. If the dice are rolled and two 6 s appear (a total of 12), you will receive $20.00; otherwise you will receive nothing.

Suggested Citation

  • Tom Arnold, 2014. "Making Decisions Sequential," Palgrave Macmillan Books, in: A Pragmatic Guide to Real Options, chapter 0, pages 15-31, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-137-39116-2_2
    DOI: 10.1057/9781137391162_2
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