Flexibility Valuation under Uncertain Economic Conditions

Abstract

In dynamic and unpredictable environments the capacity to adapt strategic investment decisions quickly to market conditions is becoming one of the most important issues. Flexibility has a value in the context of uncertain strategic projects, as decision makers can gather information repeatedly about the project and market characteristics and, based on this information, change the course of action.This paper aims to investigate the feasibility of decision tree analysis and real options approach to value flexibility under uncertain economic conditions. The research methods that were used in this paper are the analysis and synthesis of scientific literature, logic analysis and comparative analysis.The results of this study suggested that although decision tree analysis and real options approach solve the same issue, real options have advantage over decision trees in modelling real asset investment flexibilities and is the most appropriate approach for valuation of flexibility and investment opportunities under uncertain economic conditions.