Using a Real-Options Analysis Tutorial in Teaching Undergraduate Students

Abstract

An undergraduate tutorial on real-options analysis used in teaching an advanced engineering economy course is presented. The tutorial includes the binomial option pricing model and the Black-Scholes model. Reasons for using real-options analysis are included, as well as examples of calculations of the values of financial options and real options for a variety of investment scenarios. Implications of real-options analysis on the way engineering economy is taught are also treated. Specifically, the need to incorporate multiple discount rates, continuous compounding, and terminal value analysis in economic justifications is addressed. Lessons learned are shared from using the tutorial in 2015 and 2016.