This chapter describes four important real options—option to expand, option to wait (and learn) before investing, option to trim down or abandon a project, and option to vary the mix of output or the firm’s production methods—associated with capital budgeting projects. It provides practical applications of the binomial method mentioned in the previous chapter using real-world examples. Finally, it shows how to handle complex option valuation problems. The authors have discussed several realistic examples that include the following:
