A cash flow view of real options

Abstract

ABSTRACTThis article gives a cash flow view of real options in distinction from the majority of the literature on real options. Via a cash flow view, the article shows that real options can fit within conventional engineering investment analysis, in particular the usual discounted cash flow analysis familiar to most engineers, and there is no need to go looking for answers to real options problems in other disciplines. No mathematical sophistication is needed in order to understand the approach. All real options problems can be reduced to one plain option approach or, in the case of compound options, to a collection of plain options. There is no need to distinguish option type; for example, between expand or contract.