On Economic Evaluation of Real Estate Development Project Using Real Option Approach

With a typical case, the paper analyzes the value evaluation of defer option in real estate development through the application of binomial tree option model. The calculation results of net present value suggest the project should be abandoned, while the results of the binomial tree option model show the project is of development value, which should be postponed and wait for the best development opportunity. Therefore, it can be concluded that the defer option in real estate can hardly be fully reflected by traditional economic evaluation methods, however binomial tree option model can conduct a more scientific and reasonable evaluation on the value of defer option, which has a complementary and perfect function towards traditional economic evaluation methods.