New advances and applications of combining simulation and optimization
WSC '96 Proceedings of the 28th conference on Winter simulation
Using simulation to analyze R&D value creation
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Real options valuation (ROV) considers the managerial flexibility to make ongoing decisions regarding implementation of investment projects and deployment of real assets. This paper introduces a simulation-optimization approach to valuing real investment options based on a model containing several decision variables and realistic stochastic inputs. Using this approach, the value of a portfolio of real investment projects is determined by maximizing the mean discounted cash flows calculated by the model over many combinations of the decision variables. This yields an optimal decision rule that significantly increases the value extracted from the investment projects in comparison to arbitrary decision rules.