Risk analysis is used to evaluate many aspects of a project, specially the sensitiveness of some key variables. Risk
analysis together with statistical analysis allow managers to know some insides like their variables dependency or
independency and their variance. Scenario analysis provides best-case, most likely-case and worst-case scenarios.
These scenarios help managers to recognize when the project is moving in a specific direction. Break-even anlysis
helps managers recognize for example the minimum number of units to sale before a project starts making a
profit. Simulations allow managers to see the interrelation of the ramdomness of key variables that could be
expected. However, none of these analysis allow us to recognize the expected results at the end of the jorney as
real options does. Real Options when combined with a decision tree show the expected results of the different
roads the project turns. It is like a map that shows finantial results at each possible road in the map and helps in
decision making while in the middle of the project, helping to turn the project in the right direction. This paper
uses an example to tour what can be known from inside of the real options and risk analysis.
|