Evaluating potential investments becomes complex when future actions depend on various emerging situations, especially when point estimates are unavailable and only ranges of input values can be used. Managerial flexibility and continuous uncertainty are crucial aspects of realistic investment decisions. Standard valuation techniques, like Discounted Cash Flow models, often distort computed values, leading to poor decision-making. To address this, a real option valuation approach was developed, which employs a four-step process to quantify investment value amid managerial flexibility and uncertainty. While often seen as opaque, Ms. Kang demonstrates that real option valuation can be made accessible, even for those with limited prior knowledge. She discusses the shortcomings of traditional valuation techniques in product innovation and introduces the basic concepts of real option valuation. Through practical examples, she illustrates how to value different types of real options. Using Research In Motion's 2006 Financial Statement, she presents a sample 5-year business plan for the BlackBerry 9900 product innovation, employing the advanced Binomial Trees model. This work offers a valuable introduction to real option valuation, an essential management tool.
