Real option analysis is the tool used in the measurement of investment decisions and for strategic planning under uncertainty. Real option is one among the important measuring criteria used by the corporates for valuing investment opportunities. It presents a quantitative method for monitoring, measuring, and adjusting decisions according to the economic changes. It helps the management to analyze flexibility of projects. The article analyses the advantages of real option analysis for business decision-making in the dynamically changing business environment.Most of the large companies in the world have changed their business-priorities in some way. Some of them had to slow or freeze long-term projects. others have prioritized those expected to demonstrate a faster payoff. The typical techniques used to evaluate different types of projects don't leave scope for gauging various flexibilities underlying the projects. This has prevented some potentially profitable projects from takeoff.

Companies primarily use four techniques for valuing investment opportunities: accounting rate of return, payback period, Net Present Value (NPV) and real options. Accounting rate of return is the ratio of the average forecast profits over the project's lifetime to the average book value of the investment. Again a comparison with a benchmark rate is done before accepting the investment. Payback period states, how many periods company must wait before cumulative cash flows from the project exceed the cost of the investment project. If this number of periods is less than or equal to the firm's benchmark, the project is accepted. Subsequent cash flows beyond this payback period have no significance in the calculation. In NPV technique, we require estimates of expected future cash flows and an appropriate discount rate. This is where the problem arises. NPV is calculated based on the information available at the time of appraisal. NPV technique loses its significance when there is uncertainty. NPV technique was first developed to value bonds.

There is little the bond investors can do to alter the coupons they receive or the amount realized at redemption or the yield on the bond. Companies, however, are not passive investors; they have different types of flexibility like option to sell the asset, invest further, wait and see or abandon the project entirely. One alternative that ensures that companies acknowledge such flexibilities is to value these projects in a similar fashion of valuing financial options. The real option methodology goes beyond the simple valuation technique under NPV method and tries to measure this flexibility through option valuation.