Multiple Criteria Decision Making in the Valuation of Real Options

Traditional project evaluation is based on discounted cash flow method (DCF) with Net Present Value (NPV) as the main measure. This approach sometimes leads to the abandonment of profitable projects, because the DCF method does not take into account the role of managerial flexibility. The Real Options Valuation (ROV) method takes into account future situations in the valuation, assuming that the project is properly managed. The Project Manager shall have the right to take action as appropriate. A widely used method for the valuation of real options is the binomial tree method (CRR), proposed by Cox, Ross and Rubinstein. It takes into account one state variable. In many real problems, however, many factors should be considered. This leads to a multi-criteria decision-making problem. This paper presents an extension of the CRR method for several state variables.