Chapter 18

Real Option Theory and Monte Carlo Simulation

This chapter highlights the history of real option theory and then lays out two key concepts, namely Monte Carlo simulation and Brownian motion. The purpose of Monte Carlo simulation is to estimate different scenarios at a particular time. Real option theory analysis, however, adds the variable of the time domain into the analysis based on the static NPV value. In essence, it shows the possibilities or options available when the time unfolds. As a result, the decision maker can make the right decision according to the right circumstances.

Real option theory cost modeling is one of the most effective strategic methodologies for a decision maker to use when steering the business based on three ...

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