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A mathematical approach to the deferment option of an investment project

Author

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  • Salvador Cruz Rambaud
  • Ana María Sánchez Pérez

Abstract

This paper presents a model to calculate the value of the real option to defer an investment project within one, two, and in general n periods. The methodology used to deduce the mathematical expression of this option is based on the binomial model by constructing all possible future scenarios as well as their associated probabilities. Consequently, this manuscript provides the expression to assess the operative flexibility of a project when its deferment is possible. Indeed, this is an easy‐to‐handle and reliable tool that allows more accurate forecasts to reduce the uncertainty around a project then facilitating the managerial decision‐making processes.

Suggested Citation

  • Salvador Cruz Rambaud & Ana María Sánchez Pérez, 2019. "A mathematical approach to the deferment option of an investment project," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 40(6), pages 639-650, September.
    • Handle: RePEc:wly:mgtdec:v:40:y:2019:i:6:p:639-650
    DOI: 10.1002/mde.3035
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    Cited by:

    1. Salvador Cruz Rambaud & Joaquín López Pascual & Juan Carlos Meléndez Rodríguez, 2021. "Sustainability in the Aerospace Sector, a Transition to Clean Energy: The E 2 -EVM Valuation Model," Sustainability, MDPI, vol. 13(12), pages 1-17, June.

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