Mathematics of Finance Essay Example | Topics and Well Written Essays - 1250 words

Mathematics of Finance - Essay Example The potential of real option analysis is like Discounted Cash Flows (DCF), and other investment analysis techniques is simply another tool. The two techniques are complementary. Management should employ both methods in the analysis of potential investments and gather information from both (Amram, 2000). Further, we must consider a real option analysis is not ordinarily a simple technique. With it comes an amount of technical comfort required on the part of the analyst in order to implement the technique correctly. Like most techniques derived from financial theory, it is easily abused. Those who will utilize the information provided by real option analysis need training in the proper interpretation of its results (Eiteman, 2007). DCF analysis, defined as the process of valuing capital budgeting projects by discounting their future expected cash flows. DCF framework, defined as the valuing of an asset by discounting its expected future cash flows at some discount rate. Real option analysis is gaining in use and popularity. Senior management prefers this option because it has two sequences of a project. It describes the cash inflows and out flows at different times. Usually this is the way that management sees projects unfold. Real option analysis values management by its very nature.