Real Options Valuation: Binomial Trees for Expand, Delay & Abandon Decisions
Value managerial flexibility like a corporate-finance pro: static vs expanded NPV, CRR binomial parameters, the underlying value tree, and the options to delay, expand, abandon and invest in stages, with a volatility sensitivity and summary charts, in 8 graded labs on one fictional copper mine.
The first lesson is free — no account needed.
About this course
A real options valuation course that values the flexibility in one fictional copper mine, Glenmora, owned by the miner Tarrow, in a spreadsheet, for corporate finance and valuation analysts, CFA and MBA students and engineers who make investment decisions. You compare a static NPV with the same project plus the right to walk away, turn volatility into the up and down factors and the risk-neutral probability of a CRR binomial tree, build a four-year tree of the mine value, and roll option trees back to value the option to delay, the option to expand with a second processing line and the option to abandon for a salvage value, then value a two-phase project as a compound option and chart how the delay option grows with volatility. Fictional mine, illustrative figures, educational only, not investment advice. The first lab is free.
Lessons
- Static NPV vs Flexibility: Why NPV Undervalues ProjectsFree
- Binomial Tree Parameters: u, d and the Risk-Neutral p Pro
- Building the Underlying Value Tree Pro
- Option to Delay: an American Call on the Project Pro
- Option to Expand: Paying to Scale Up Pro
- Option to Abandon: a Put with a Salvage Value Pro
- Staged Investment: a Compound Option in Two Phases Pro
- Sensitivity to Volatility & a Summary Chart Pro