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Real option valuation
Although real options can be valued in different ways, the binomial option-pricing method is one of the most widely used of those methods. In traditional options analysis, the binomial model breaks down the time to expiration into potentially a very large number of time intervals, or steps (Hoadley, 2009). While there is no set date of expiration for most real assets, using the binomial model approach in real option analysis one uses the same type of decision tree to determine all of the possible paths that the real asset could take and determine the terminal value of the asset depending on the path. One then works backwards to determine the value of the asset at each different step of the process. In order to understand the binomial option-pricing approach, it is critical to remember that each point on the tree only represents the option of making an investment. The options will not be exercised unless they have a positive value
One widely-used version of the binomial model is the Black and Scholes approach, which has traditionally been used to value stock options. This approach has also been successfully applied in valuing real options in long-term projects

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