Project NPV as a portfolio of derivative securities - A discrete time analysis

it has long been recognized that applications of the net present value (NPV) investment decision making methodology can have serious deficiencies in situations where investment can be delayed and, once made, future decisions allow increases or decreases in the level of output, While the necessity of period by period analysis is sometimes acknowledged, little if any practical illustrative model building has beers published to date, aside from algorithms using continuous time stochastic processes which appear difficult to implement, This paper illustrates in discrete time the analysis of project NPV as a portfolio of exotic option. (C) 1997 Elsevier Science Ltd.