Seize innovation opportunities you would have missed with traditional NPV approaches.

The level of uncertainty is the key consideration for choosing suitable methods for investment decision making and project management. Signs of a “significant” uncertainty level include:

• NPV can turn negative for reasonably pessimistic scenarios.
• Doubts let decision makers add security margins to the NPV calculation: higher WACC (“hurdle rate”), higher costs, longer durations, lower revenues.
• Resolving uncertainties requires a non-negligible investment in time and/or money. For that reason, these activities must be integral part of the business case and the investment decision.
• Business case owners perceive opportunities (option) they cannot express in the NPV framework.

For predictable, low uncertainty cases, the suitable project management methods are waterfall or V-cycle. NPV (Net Present Value) is the matching financial valuation method.

For cases with significant uncertainty, project teams switch to adaptability (agility) such as to minimize risks. Incorporating adaptability into business cases greatly strengthens realism and pertinence of investment decisions. This is achieved by using Real Options finance instead of the NPV.

Business case evaluation with Real Options enables organizations to:

• Seize valuable business innovation opportunities that might be falsely rejected using the NPV.
• Account for the entire scope of opportunities that business case owners need to express.
• Strengthen the realism and accuracy of financial evaluations for adaptive projects
• Make investment decisions appropriate to the level of uncertainty.

By embracing Real Options finance, organizations can unlock new sources of competitive advantage, ensuring that promising ideas are not missed and that resources are allocated to the most value creating way.

Note

Key Takeaway: Real Options finance empowers organizations to capture innovation opportunities, make realistic investment decisions, and stay ahead in a rapidly changing market.