Dynamic programming in the binomial tree structures for real options analysis

Traditional project valuation is based on Discounted Cash Flow (DCF) methods, with Net Present Value (NPV) as main criterion of project effectiveness. But this approach sometimes leads to abandon profitable projects, because DCF don't account managerial flexibility. Real Option Valuation could improve this situation. There are many methods of this valuation. Most important methods are based on binomial tree framework, where Dynamic Programming is used. There are well-known methods in which the value of the option depends on one factor. In this paper we consider a situation in which the real option depends on two factors. This leads to higher computational complexity, which will be examined in the work.