Capital Budgeting for Interrelated Projects: A Real Options Approach

by Paul D. Childs, Steven H. Ott, and Alexander J. Triantis

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The graph above shows the various policy valuations at time t1 vs the outcome of the first project. The black curve is the value of doing nothing, the blue curve is the value of implementing project a only, the green curve is the value of developing project b only, and the red curve is the value of implementing project a and developing project b. The color coded bar along the bottom of the graph corresponds to the optimal intermediate policy for a given value outcome for project a at time t1. The correlation coefficient (between the benefits of the two projects) changes from -1 to 1 as the animation progresses. All other parameters match those of Figure 2 from the paper.

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