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Project Valuation Using Real Options by Chandra Papudesu, Prasad Kodukula

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CHALLENGES WITHTRADITIONAL TOOLS

The traditional valuation tools, including the discounted cash flow (DCF) method and decision tree analysis (DTA), have been employed for several decades in valuation of projects. Although these tools have been effective for many applications, they pose certain challenges under specific conditions. The objective of this chapter is to discuss the challenges and address why a more sophisticated technique is needed. In order to recognize and appreciate the challenges, it is important first to understand risks and how they are accounted for in the DCF and DTA methods. Therefore, this chapter is divided into three ...

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