Real options method to evaluating investment project and one application in energy sector

Evaluating the investment projects by using option theory is called real options approach. Under real options approach, projects are evaluated in a dynamic way which is the most important advantage of real options approach over the other investment evaluation techniques. For instance, while projects are either accepted or rejected under the NPV method, there is the choice of project deferral in the real options approach in addition to the other choices.Besides, real options approach considers probability of termination of the project before or later than expected and also considers the probability of contraction or expansion of the project. Therefore, it is important to use real options approach in order to evaluate and manage investment projects.In this study, the concepts of investment, investment projects and option are described; real options management together with traditional methods used for evaluating the investment projects are analyzed, and the application of real options management in the energy sector is performed.