In today's business scenario, traditional measures of capital budgeting were no longer adequate to reflect the dynamic world of new economy. The current era is characterized by increased uncertainty and complexity because of changed market and economic conditions, M&A, globalization, integration of world financial market, increased competition, and the advent of new and emerging technologies. Typical approaches to project evaluation are based on Discounted Cash Flow (DCF)-based measures such as Net Present Value (NPV) and Internal Rate of Return (IRR). However, these demonstrate weaknesses in dealing with uncertainty, complexity, and flexibility. The techniques only use tangible factors and do not take into account intangible factors such as future competitive advantage, long-term growth opportunities, and managerial flexibility. This paper discusses the limitations of the traditional capital budgeting tools. Real Options (RO) approach is a method of evaluating and managing strategic investment decisions in an uncertain business environment. The RO approach seeks to uncover and quantify a project's embedded options. Firms in the fast-growing and ever-changing industries of the new economy require a dynamic approach like RO in investment decisions. This study also illustrates numeric example of RO. It discusses various approaches of using RO in adopting emerging technologies like Radio Frequency Identification (RFID). It also discusses various embedded options available for RFID deployment in supply chain management. Real option is an interdisciplinary subject, combining finance, strategy, and IT. RO analysis is a powerful financial tool that meshes well with the complexities of emerging technology projects that inherently carry significant uncertainty, but also represent great potential value for the firm. RO analysis is a very exciting development in the practice of capital budgeting. RO is a new economy tool and gives a better structured decision making process for complex and interdependent investment decisions of new economy. The study also explains the limitations of RO.

In the current era of new economy, managers the world over are facing increasing uncertainty while taking complex strategic decisions of investments in emerging technologies. Such decisions will have an enduring impact on firms' long-term profitability and sustained growth. Usually, this type of uncertainty erodes real value when such investment decisions are evaluated using traditional capital budgeting methods such as Discounted Cash Flow (DCF)-based Net Present Value (NPV) or Internal Rate of Return (IRR). They are too limited a basis on which to make emerging technology investment decisions as they undervalue returns and focus management attention on short-term cash flow when, perhaps, the biggest benefits lie in building a strategic asset for long-term growth and competitive advantages.

Traditional methods of capital investment project evaluation do not provide the flexibility for strategic decision making on new business ventures. However, Real Options (RO) tools encourage proactive strategic management and, when used properly, can significantly improve decision making with regard to capital investments. This study aims at investigating the application of RO in emerging technology applications. The application of RO as a concept is gaining favor, because it provides a more holistic project analysis without the necessity to change current valuation methods fundamentally.

Capital budgeting tools help firms in the decision-making process of allocating resources to investment projects, normally on a long-term basis. Managers are required to make capital investment decisions on a regular basis. These decisions are especially challenging when they involve the commitment of large quantities of assets to a particular course of action that is not easy to reverse ex post—getting them wrong can be very expensive. Traditional project evaluation focuses on expected values and ability to make future decisions. The typical approaches to project evaluation are based on DCF-based measures such as NPV and IRR. Firms have as primary objective the maximization of its shareholders' wealth, and consequently, their return on investment. The NPV is consistent with this same objective. In an ideal market where there are no capital constraints or constraints for any other input, shareholder value is maximized by choosing projects with positive NPV. Other valuation measures used in industry, such as the ARR and the IRR, are considered to be inferior.

RO-Based Capital Budgeting, Discounted Cash Flow, DCF, Net Present Value, NPV, Internal Rate of Return , IRR, Radio Frequency Identification, RFID, Microelectronics, RFID investments, Productivity Paradox, RFID technology, Business Process Reengineering , BPR.