A Study on Real Options Valuation Vs. Traditional NPV in Capital Budgeting Decisions: A Comparative Study

Capital budgeting decisions are critical to a firm’s long-term strategic success. Traditionally, the Net Present Value (NPV) method has been the cornerstone of investment appraisal, offering a static assessment of expected future cash flows discounted at a risk-adjusted rate. However, the NPV approach does not adequately account for managerial flexibility under uncertainty. Real Options Valuation (ROV), derived from financial option theory, addresses this limitation by valuing the strategic choices embedded in investment projects. This paper explores both methodologies in depth, compares their strengths and limitations, and provides empirical and theoretical insights into when and how real options can enhance decision-making in capital budgeting.