In projects of high uncertainty, it is difficult to properly perform an economic evaluation only with traditional methods such as net present value. There are different scenarios that radically change project flows, and it is insufficient to incorporate risk only in the interest rate.
The methodology of real options incorporates the uncertainty of these different scenarios, assigning them a probability of occurrence, which allows valuing the option (not the obligation) to develop the project.
We recommend evaluating in phases, because they allow us to assess the option of moving forward in different moments of time.
In the early stages, rather than focusing on the NPV, is important to understand the probability that the business is of an attractive size and what are the assumptions that must be made for this.Alfonso Márquez de la Plata - CEO Derco