Real Options Valuation: Binomial Trees for Expand, Delay & Abandon Decisions

What you'll build

What you will be able to do

Each lab ends with a concrete result that you build yourself and the checker confirms, cell by cell.

• Value the Glenmora mine with a classic NPV, then add the right to walk away after year 1 and measure what that flexibility is worth.
• Turn the volatility of the mine value into the up and down factors and the risk-neutral probability of a binomial tree.
• Build the four-year binomial tree of the Glenmora mine value, the risk-neutral probability of every end node and two checks on the tree.
• Value Tarrow's right to wait up to four years before building the mine by rolling an option tree back from year 4 to today.
• Value Tarrow's right to add a second processing line to Glenmora and see how it turns a negative static NPV into a positive expanded NPV.
• Value Tarrow's right to close Glenmora and sell the equipment, and decide whether the mine is worth its asking price.
• Value Glenmora as a two-phase programme, where paying for phase 1 buys the option to build in phase 2, and compare it with committing to everything today.
• Value the delay option for six volatilities in one row-by-row formula, chart how the option value rises with σ, and summarise all four real options.