Abstract:

For a few years now, a new concept to value corporate investment decisions is slowly making its way from academic research into business application: the real options approach. Since the 1980s researchers speak of a new paradigm in corporate investment valuation, revolutionizing traditional valuation techniques in enabling a quantification of the value of strategic decisions.

In particular, competitive environments with a high degree of risk, for example high-technology industries, suffer from the insufficiencies of traditional valuation techniques in measuring opportunities and their strategic value in investment decisions. So far, the positive net present value rule of thumb systematically undervalues strategic investments, if their value derives mainly from the option component and not from their cash flow streams.

This article aims to contribute to a wider awareness and application of the real options approach in business practice. Providing a conceptual presentation beginning with the insufficiencies of traditional valuation techniques leading to the advantages of the real options approach, its communalities and differences with discounted cash flow valuation and a rough case study for the Information Communication Technology or any other high technology industry.