Real options and its application in IT project valuation

Abstract

The environments in which investment IT projects are developed are often characterized by significant uncertainty. Throughout the investment period, various microeconomic and macroeconomic variables –such as inflation, interest rates, and gross domestic product– are subject to change. In this context, real options become a crucial and complementary tool for the financial evaluation of investment IT projects. Unlike traditional Net Present Value (NPV) calculations, which may not fully capture the strategic flexibility of investments, real options provide a more nuanced view of when decisions should be made by incorporating the value of managerial decisions and future opportunities. In this context, this study presents an overview of realistic options and their use in the valuation of IT investment projects. Through real options analysis, it is possible to identify and assess opportunities that might otherwise be overlooked or rejected when using conventional evaluation techniques. This approach allows for a more strategic and adaptable investment analysis, potentially leading to more efficient and informed investment decisions in uncertain and dynamic business environments.