Many important risky projects are characterized by stochastic processes embedded in non-linear, feedback structures with delays. System dynamics models may be used to estimate the cash flow resulting from these projects. If these projects include managerial flexibility (real options), a correct financial evaluation of these cash flow requires the use of real options methodology. We adapt prior work on real options valuation in the decision analysis literature to develop a methodology that avoids the need to estimate a risk-adjusted discount rate for the project with options. We illustrate this approach with a model drawn from the wind power industry, which is characterized by numerous uncertainties and high managerial flexibility. We conclude with a discussion comparing this methodology to the previous methods and describe under what conditions each one might be a more appropriate choice.

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Date created

• 2009 July 26-2009 July 30

Type

• Document

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• Processing documentation available at: https://wiki.albany.edu/display/SCA/Processing+Ingested+Digital+Files

License

• Creative Commons BY-NC-ND Attribution-NonCommercial-NoDerivs 4.0 International

  
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ITEM CONTEXT

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4818cb531cdd68d6ec6af3f291216fc7

Scope and Contents

Part of

b3584c6b53c3f58e0202549d7d851f84

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Part of

23d738ba88f8333bc39725f9cb5bd0b8

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Collection

System Dynamic Society Records

Scope and Contents

Collecting area

• This collection is part of the University Archives