Abstract:
Over the years, the discounted cash flow approach (DCF) has been the valuation technique
choice of many practitioners, academics and corporate finance managers. Such valuation
techniques include the NPV, IRR and Payback. These techniques are widely employed due to
their intuition and easy computation. However, these techniques do not tell us what to do
next after accepting or rejecting a project. The shortcomings of DCF models are addressed
by the Real Option Valuation (ROV). The ROV approach takes into account the stochastic
nature of underlying project drivers (such as sales volume and the selling price) and
managerial flexibility. This study sought to test the applicability of the real options to value
managerial flexibility. Precisely, this paper sought to determine whether ROV serve as adjunct
to the existing DCF techniques, or replaces the existing capital budgeting techniques in
emerging markets like Zimbabwe. Two embedded options were identified, namely the
abandonment and expansion option. The study found out that apart from DCF valuation
techniques being currently employed by the firm, they can as well incorporate Real Options
Analysis to decision making because if accurately valued and timeously executed, real options
do add firm value.
