This appendix provides some basic financial statement analysis concepts used in applying real options. The focus is on calculating the free cash flows used under different scenarios, including making appropriate adjustments under levered and unlevered operating conditions. Although many versions of free cash flows exist, these calculations are examples of more generic free cash flows applicable under most circumstances. An adjustment for inflation and the calculation of terminal cash flows are also presented here. Finally, a market multiple approach that uses price-to-earnings ratios is also briefly discussed.
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