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Question
Which of the following most accurately lists the steps in the four-step process for valuing flexibility in the correct order?
a) 1. Estimate NPV without flexibility. 2. Model uncertainty in event tree. 3. Model flexibility in decision tree. 4. Estimate contingent NPV.
b) 1. Estimate NPV without flexibility. 2. Model flexibility in decision tree. 3. Model uncertainty in event tree. 4. Estimate contingent NPV.
c) 1. Model uncertainty using real-option valuation. 2. Model flexibility using decision tree analysis. 3. Estimate NPV without flexibility. 4. Arithmetically weight the three results to estimate contingent NPV.
d) 1. Model uncertainty using real-option valuation. 2. Model flexibility using decision tree analysis. 3. Estimate NPV without flexibility. 4. Geometrically weight the three results to estimate contingent NPV.
Answer
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