| Investment decisions are, as a rule, characterized by uncertainty, irreversibility and flexibility. Simple net present value calculations will not account for these features. In many situations even flexible investment planning with decision trees, which represents the most advanced method of traditional investment appraisal, does not have the capacity to solve practical decision problems adequately. One handicap is a realistic and manageable representation of stochastic variables. It has long been known that stochastic simulation procedures offer a nearly unlimited capacity to represent distributions and stochastic processes. However, a standard simulation will not allow for the consideration of flexibility. The problem is that with a simple forward... |
