![]() ![]() The option value is then the expected value of the maximum of the difference between the two discounted distributions or zero. Which leads us to the second takeaway, that 50 of the value of real options is simply thinking about it. Dealmaking Using Real Options and Monte Carlo Analysis outlines a new approach for creating flexible, practical valuation models by combining ROA and MCA into. It does an excellent job of demystifying a difficult and complex subject. It is both an analytical process as well as a decision analysis thought process. Real Options Analysis is the clearest book on real options that we have read to date. The first is the fact that real options analysis is not an equation or a set of equations. The method captures the real option value by discounting the distribution of operating profits at R, the market risk rate, and discounting the distribution of the discretionary investment at r, risk-free rate, before the expected payoff is calculated. There are two major takeaways from this paper. The mathematical equation for the DM Method is shown below. ![]() 1 Typical project cash flow with uncertainty ![]()
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