Study Of Investment Evaluation Of The Projects Based On The Trinomial Tree Model Of Real Option

With the great development of technology and the competition of the global market, project investment plays an important role in both developing the society and building up the national power. Therefore making decisions for project investment and evaluating them have become more and more popular. Traditional valuation tools, including DCF (Discounted Cash Flow), are the major approaches in the investment decisions. But in the uncertain world, more and more problems can not be solved by them. For example, traditional valuation tools can not evaluate the flexibility of the projects. So the real option approach is now applied in a wide range of investment.Option pricing theory is one of the greatest discoveries in finance in the 20th century. Its principle, method and conclusion can be applied in many economic and management fields. When option pricing theory is applied to the area of investment, it is called real option theory, which opens an entirely new way to investment appraisal for people as well as enterprises.This paper uses the real option theory to evaluate and plan the project investment, and build up the application framework of real option after analyzing the characteristics of real option in evaluating project investment. Based on the deficiencies of Binominal tree in precision and calculation, it sets up a Trinomial tree pricing model, whose limitation is the famous Black-Scholes pricing model. This paper has a deep research in applying real option pricing model to judging and evaluating project investment throng a case study which proves Trinomial tree method is more accurate than Binominal tree method. In the end, we can easily come to the conclusion that real option is a more efficient method of project evaluation when there is much uncertainty and choice in the project investment.