2007 Volume 24 Pages 111-119
This paper studies real option problems with stochastic interest rates and the tam structure of interest rates. Numerical experiments reveal that both threshold value of the project cashflow and option value show wrong value in the conventional methods with deterministic interest rates. For a typical example, threshold value of the project cashflow is about 5 times larger than that in the conventional methods, and the option value is about 4 times larger than that in the conventional model. We conclude that we need considering stochastic interest rates and the term structure of interest rates, when we deal with real estate investment problems.