The Datar–Mathews Method (DM Method) is a method for real options valuation. The method provides an easy way to determine the real option value of a project simply by using the average of positive outcomes for the project. The method can be understood as an extension of the net present value (NPV) multi-scenario Monte Carlo model with an adjustment for risk aversion and economic decision-making. The method uses information that arises naturally in a standard discounted cash flow (DCF), or NPV, project financial valuation. It was created in 2000 by Vinay Datar, professor at Seattle University; and Scott H. Mathews, Technical Fellow at The Boeing Company. Method The mathematical equation for the DM Method is shown below. The method captures the real option value by discounting the distribution of operating profits at R, the market risk rate, and discounting the distribution of the discretionary investment at r, risk-free rate, before the expected payoff is calculated. The option value is then the expected value of the maximum of the difference between the two discounted distributions or zero. Fig. 1. is a random variable representing the future benefits, or operating profits at time T. The present valuation of uses R, a discount rate consistent with the risk level of R is the required rate of return for participation in the target market, sometimes termed the hurdle rate. is a random variable representing the strike price. The present valuation of uses r, the rate consistent with the risk of investment of In many generalized option applications, the risk-free discount rate is used. However other discount rates can be considered, such as the corporate bond rate, particularly when the application is an internal corporate product development project. is the real option value for a single stage project. The option value can be understood as the expected value of the difference of two present value distributions with an economically rational threshold limiting losses on a risk-adjusted basis. This value may also be expressed as a stochastic distribution. The differential discount rate for R and r implicitly allows the DM Method to account for the underlying risk. If R > r, then the option will be risk-averse, typical for both financial and real options. If R < r, then the option will be risk-seeking. If R = r, then this is termed a risk-neutral option, and has parallels with NPV-type analyses with decision-making, such as decision