Title

Volatility Estimation of Forecasted Project Returns for Real Options Analysis

Abstract

Real Options Analysis is a technique that offers advantages over the traditional Discounted Cash Flow (DCF) approach for determining project valuation. Although options analysis uses some of the same input variables used in the DCF approach, it requires one additional variable, the volatility of the project's forecasted returns, which is notoriously difficult to estimate reliably. There are several techniques that are used to model volatility when relevant historical data from similar projects are not available. This paper reviews the nature and potential limitations of these approaches, and provides recommendations regarding the appropriate uses of the estimates resulting from these methods.

Department(s)

Engineering Management and Systems Engineering

Keywords and Phrases

Project Valuation; Real Options Analysis

Library of Congress Subject Headings

Discounted cash flow

Document Type

Article - Conference proceedings

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2004 American Society of Engineering Management, All rights reserved.

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