Introduction
1.1 Motivation for the Thesis
Real options are one of the most fascinating research topics in Finance today. There are many reasons for this. First, the weaknesses of the Discounted Cash Flow (DCF) method, the most common valuation tool in Corporate Finance,have become more and more obvious to practitioners and are therefore putting pressure on academic research to improve traditional valuation tools. Second,literature on real options, especially the pricing techniques (which are mathematically and numerically much more savvy than classical methods like the DCF method. Internal Rate of Return method, or Payback Period method) have become more accessible to the broad public since the mid 1990s. This has sharpened the awareness for evaluating investment projects with the real options approach and has highlighted its advantages over traditional valuation tools. Third, the very volatile world economic situation and the even greater flexibility being built into investment projects calls for valuation tools that can incorporate this volatility and flexibility and model it accurately. As will be seen, traditional methods are not capable of doing this. This insight was the starting point of the research area real options in 1977 when Stewart C. Myers from the MIT Sloan School of Management published his pioneering article on the subject in the Journal of Financial Economics^.