Managerial flexibility role on financial investment analysis: a case study of public housing

Abstract

The limitations of Discounted Cash Flow (DCF) method for capturing the opportunity value phenomenon in the uncertainty of housing investment analysis cause difficulties in the decision-making process for the investors. Flexibility factor becomes the obstacle for investors in project uncertainty. Real Options Analysis (ROA) is an important factor included in the DCF method because it offers managerial flexibility in the uncertainty of housing investment decision making. Flexibility in ROA is a right and investors do not have an obligation to respond to uncertainty in project investment. In this research, the type of flexibility on ROA used is an option to carry out promotional activities. The research results indicate that promotional activities affect the increase in Net Present Value (NPV) so that the benefits are maximized. Comparison of the results of investment analysis between ROA and DCF methods indicates an added value due to the existence of such flexibility. The investment simulation of ROA method was conducted using Monte Carlo method approach. The role of flexibility from the simulation is obtained by increasing the added value by 5.2%, and optimal promotion occurs in the first two years of investment.