Another way to understand the real options value for engineers

Abstract

This paper is concerned with explaining real options values (ROV) using an opportunity cost concept. Through exploring the opportunity costs embedded in the ROV, we hope that the following presentation will be helpful for engineers to understand the meaning of the terminologies relevant to the ROV. With this belief, we performed the work under which the real investment project was delayed by 1 year only. The three different opportunity costs were explored in this work for the purpose of the paper as follows: an interest earning opportunity, an opportunity loss, and an expected opportunity gain. A short numerical example was demonstrated to show that the real options value derived with the three opportunity costs was equivalent to the value done with the binomial lattice model proposed by Cox, Ross, and Rubinstein.