Industrial and Management Systems Engineering


Date of this Version

Spring 4-30-2010


A Thesis Presented to the Faculty of The Graduate College at the University of Nebraska In Partial Fulfillment of Requirements For the Degree of Master of Science, Major: Industrial and Management Systems Engineering, Under the Supervision of Professor Erick C. Jones. Lincoln, Nebraska: May, 2010
Copyright 2010 Olabode Alabi


Real Options Analysis (ROA) has become a complimentary tool for engineering economics. It has become popular due to the limitations of conventional engineering valuation methods; specifically, the assumptions of uncertainty. Industry is seeking to quantify the value of engineering investments with uncertainty. One problem with conventional tools are that they may assume that cash flows are certain, therefore minimizing the possibility of the uncertainty of future values. Real options analysis provides a solution to this problem, but has been used sparingly by practitioners. This paper seeks to provide a new model, referred to as the Beta Distribution Real Options Pricing Model (BDROP), which addresses these limitations and can be easily used by practitioners. The positive attributes of this new model include unconstrained market assumptions, robust representation of the underlying asset‟s uncertainty, and an uncomplicated methodology. This research demonstrates the use of the model to evaluate the use of automation for inventory control.