Abstract
Abstract In today’s uncertain and highly competitive business environment, the difficulty to make strategic investment decisions is growing. The dominant discounted cash flow analysis requires the assumption of perfect certainty of project cash flows. However, under uncertainty traditional DCF approach falls short of providing adequate strategic decision support, and this situation demands new methods for investment evaluation. Real options approach (ROA) has shown the potential for valuation of strategic corporate investment decisions and managerial flexibility in situations of high uncertainty. Under ROA, projects are viewed as real options that can be valued using financial option pricing techniques. This framework allows their owner to keep investment options open and to benefit from the upside potential of an opportunity while controlling the downside risk. The main aim of this research is to investigate the feasibility of real options approach and traditional DCF analysis for assessment of strategic investment projects under environmental uncertainty.
Highlights
Strategic investment projects condition future opportunities of a company and have substantial impact on its long-term survival, corporate growth, competitive advantages, profitability, shareholder value creation and success
This research aims to investigate the feasibility of real options approach and traditional DCF analysis in order to assess strategic investment projects under environmental uncertainty
The following research methodology was used: after systematization and generalization of the scientific literature for the analysis of the peculiarities of strategic investment project valuation techniques, DCF analysis and Real options approach (ROA), the traditional DCF model was calculated to analyse the value of strategic investment project without options and the RO valuation approach was applied for the option to expand
Summary
Strategic investment projects condition future opportunities of a company and have substantial impact on its long-term survival, corporate growth, competitive advantages, profitability, shareholder value creation and success. Regardless of the uncertainties present in a decision environment, traditional DCF model for strategic investment project evaluation is a commonly used methodology to assess whether to begin an investment or not. By evaluating and managing strategic investment projects under uncertainty, this approach encourages proactive investment management and, if used properly and recognized in real life managerial surroundings, can greatly improve strategic investment decision making. This research aims to investigate the feasibility of real options approach and traditional DCF analysis in order to assess strategic investment projects under environmental uncertainty. The following research methodology was used: after systematization and generalization of the scientific literature for the analysis of the peculiarities of strategic investment project valuation techniques, DCF analysis and ROA, the traditional DCF model was calculated to analyse the value of strategic investment project without options and the RO valuation approach was applied for the option to expand
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