ADVANCED CAPITAL BUDGETING: REAL OPTIONS VALUATION

The primary goal of a financial manager is to maximise the shareholder value, this goal is reached when the return on invested capital (ROIC) is higher than the weighted average cost of capital (WACC). Capital Budgeting Methods are handy tools through which one can understand better which are the investments that will yield higher returns and indeed reach the goal of increasing the shareholder value. In an environment that is characterised by change and uncertainty, flexibility is a key factor to obtain a competitive advantage. Real Options Valuation technique is a capital budgeting method that is able to account for uncertainty and therefore give decision-makers a lot of flexibility. This dissertation aims to give an overview of Real Options and exemplify how this valuation technique can be most valuable the more uncertain an investment is.