engleski

The value of flexibility in uncertain times

Today's market environment is characterized by constant change and uncertainty. It is difficult to assume that the management will not take certain actions related to the investment project in the event of unexpected unfavorable circumstances or in the event of unexpected favorable circumstances. In such conditions, management has the flexibility to postpone, expand, abandon or otherwise change the investment project at different stages of its life. In this way, flexibility emerges as an added value, and any project that increases flexibility also increases the actual net present value of a project. This paper studies the shortcomings of traditional capital budgeting methods and the possibilities for improvement by applying the real options approach. Given that traditional net present value does not take into account management flexibility, it is necessary to introduce extended or real net present value. For investment projects evaluation in turbulent and uncertain conditions, it is necessary to apply the real options approach. Real option valuation models can quantify elements of flexibility ; which traditional net present value does not take into account.

flexibility, real options, capital budgeting methods, real net present value

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