Interactive Binomial Tree Analysis for Engineering Projects
Wait before investing to reduce uncertainty. Modeled as a call option with project value as underlying and investment cost as strike.
Scale up successful projects. Call option with expanded project value as underlying and expansion cost as strike.
Exit projects early and recover value. Put option with project present value as underlying and salvage value as strike.
Switch inputs/outputs flexibly. Call on value difference: max(S_B - S_A - K, 0)
Context: An energy company is evaluating whether to develop an offshore oil field. The project requires a $500M initial investment, but oil price volatility creates significant uncertainty about future cash flows.
Option to Delay Strategy: Instead of investing immediately, the company negotiates a 3-year lease that gives them the exclusive right to develop the field. This creates an option to delay the investment until oil prices and market conditions become clearer.
Why This Matters: Traditional NPV analysis would show the project has an expected value of $600M with $500M investment cost, yielding $100M NPV. However, this ignores the strategic flexibility. If oil prices drop significantly, the company can walk away (letting the option expire). If prices rise, they can proceed with development. This flexibility is valuable!
Enter parameters and click calculate to see results
In traditional project evaluation, we calculate Net Present Value (NPV) and go with the best-looking number. But real-world projects arenโt that simple, right?
Thatโs where Real Options come in!
A real option gives you the right (but not the obligation) to make a strategic move โ at the right time, under the right conditions.
Imagine you're navigating a branching path. Every step forward leads to more possibilities โ values go up or down based on volatility. That's what the binomial tree model does!
It simulates all possible outcomes of your projectโs value and helps you evaluate your best strategy at each decision point.
Our interactive web app supports four key types of real options:
Wait before investing to reduce risk.
Example: A $100M factory build might be worth more if you wait a year. Use the tool to find out!
Scale up operations if things go well.
Example: A $60M renewable plant that can double in size โ should you expand later or now?
Exit gracefully if the project turns sour.
Example: A $40M product line that can be scrapped for $30M if sales flop. Is the option worth it?
Switch from Project A to B when the market favors it.
Example: Start with Project A, but switch to Project B next year if it looks better. Should you bake this option into your plans?
Tip: You can also use our NPV Calculator to estimate the base project value.
Here's what youโll walk away with:
Whether youโre a project manager, analyst, student, or engineer making big decisions โ this tool is your secret weapon for navigating uncertainty!
Stay flexible. Stay smart.
Only at EngiSphere
Try also:
Real Option Valuation Calculator | Powered by Black-Scholes!
