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Traditional DCF versus Real Option for Strategic Investment Decisions Valuation

KHIARI ZAHIA

Abstract:
In an economic environment characterized by rapid change and great uncertainty the static nature
of the conventional net present value and discounted cash flow (DCF) method becomes inadequate
to set up an effective investment strategy. This Paper tries to introduce the Real Options Approach
as a novel means of evaluating investment decision and provides a good solution on the uncertain
problems. Real options assume a dynamic series of future decisions where management has the
flexibility to adapt given changes in the business. However, the complexity of the real option
models makes them difficult to apply in real world.
Keywords: Net Present Value, Real Options, Uncertainty, Flexibility, Investment valuation.