Monte Carlo Simulations in Real Options Analysis

The presented paper focuses on the use of Monte Carlo simulations while evaluating an investment opportunity using real options. The first section provides a brief theoretical overview of the basic terms and methods. Static and dynamic methods of evaluating the cost-effectiveness of an investment are described, as well as more advanced methods such as the real options. Monte Carlo simulations are introduced as a means of integrating uncertainty into the calculations. The rest of the paper provides a model example and calculations of all of the methods and discusses the different views that each method has, as well as the advantages and disadvantages of these methods.