Abstract
Goal: This study aims to assess the impact of using the method of real options in investment analysis through a case study on a retail firm.
 Design / Methodology / Approach: It was targeted the applications of the real options method in a different type of environment and it was compared to another method more commonly used, the discounted cash flow method (DCF). The implementation and assessment of the real options method was investigated by means of a case study conducted in an investment analysis in a retail units firm.
 Results: The use of the real options method showed a more concise applicability over the DCF method. The results show that the project’s value, after the inclusion of managerial flexibility, increased significantly, which indicates that the analysis of the discounted cash flow undervalued the investment in question, since it disregarded the flexibility to expand or abandon the project.
 Limitations of the investigation: The presented method is proper to long-term processes where it is possible to make changes during the project. Investments in this sector usually are more related to short and medium-term decisions, making the application difficult due to the short decision-making period available to the managers.
 Practical Implications: The study provided the incorporation of flexibility through different pathways during the building project in a retail units firm. It was showed different scenarios where practitioners could decide among expanding, proceeding, reducing or abandoning the retail units based on the characteristics of their investments.
 Originality/value: The results obtained are an indication of this methodology to industrial businesses that are relatively volatile and that need a certain degree of flexibility in order to burgeon, such as the case of the retailing sector.
Highlights
The traditional method of project financial viability analysis through discounted cash flow underestimates the value of the project analyzed and does not consider possible alternatives for the investor, such as expanding or discontinuing the project
The value of the project’s flexibility is $218,185.00, which corresponds to a 16% increase over the amount calculated by the discounted cash flow
It was investigated a new approach for the same situation and, according to the results presented, it has been found that the implementation of the real options method for investment analysis and assessment is the best option for the case
Summary
Competition and increasing market demands typically require the business environment a more specific planning in which the decision-making process is done through assessment methods These assessment methods serve to support decision making and are significantly important for companies in order to consider all possible investment alternatives (Liu et al, 2012; Keller et al, 2017). Traditional investment analysis tools ignore a relevant principle of many investment projects that is to allow project delay, the possibility of expansion or even discontinuation, when the project has already been started (Bodie and Merton, 1999; Scotelano et al, 2017) Without estimating these options, there is a great chance that the project’s Net Present Value (NPV) will be underestimated by the analyst.
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