Inappropriate asset valuation would fail to determine the actual status of the business performance which would adversely affect the formulation of business strategies.
According to Brigham & Daves (2009), “Real options are opportunities for management to change the timing, scale, or other aspects of an investment in response to changes in market conditions.” (Brigham & Daves, 2009, p.490). Since the real options are concerned with the real assets such as plants, fixtures, and land, it enables the management to take timely and appropriate decisions regarding investment strategies. Brigham and Daves also opine that formulation of model and estimation of input is necessary for the valuation of real options in investments. It will be a cumbersome task for the management to determine the exact value of real options in investment since it includes intangible components like contract, decision to expand or abandon etc. Even though exact valuation of real options is not possible, it helps to determine the sustainability of the proposed project. According to the writers, in order to valuate the real options more accurately, it is better to treat the valuation with a ‘standard model for financial option’. Similarly usage of ‘discounted cash flow valuation and decision tree analysis’ are also better methods in order to increase the accuracy of valuation of real options (Brigham & Daves, 2009, pp.490-491). If the value of underlying asset (an asset underlies and offers value to the particular security or investment) can be properly estimated, then it is possible to find out the value of real options in investment almost accurately. Likewise, while dealing with valuation of real options, it is essential to represent the payouts precisely in order to bring out maximum relevant facts in the valuation process. The Black-Scholes model is a comparatively better method to determine the theoretical value of real