Real option evaluation in fuzzy environment∗

Financial options are known from the financial world where they represent the right to buy or sell a financial value (mostly a stock) for a predetermined price (the exercise price), without having the obligation to do so. Real options in option thinking are based on the same principals as financial options. In real options, the options involve real assets as opposed to financial ones. To have a real option means to have the possibility for a certain period to either choose for or against something, without binding oneself up front. Real options are valued (as financial options), which is quite different with from discounted cashflow investment approaches. The real option rule is that one should invest today only if the net present value is high enough to compensate for giving up the value of the option to wait. Because the option to invest loses its value when the investment is irreversibly made, this loss is an opportunity cost of investing. However, the pure (probabilistic) real option rule characterizes the present value of expected cash flows and the expected costs by a single number, which is not realistic in many cases. In this paper we consider the real option rule in a more realistic setting, namely, when the present values of expected cash flows and expected costs are estimated by trapezoidal fuzzy numbers.