Role of Optimal Investment Timing using Real Option Valuation to Support Foreign Direct Investment Decision Making

Abstract

There is an essential need for developing economies to attract foreign direct investment, reduce capital expenditure for the country. However, the need and expectation of such may be essential to encourage infrastructure development in Low Developing Countries (LDC’s). Regional integration has not been explored optimally in the African Context. In this research different models such as the Optimal Investment Timing (OIT) using Real Option Valuation (ROV) to support decision-making in Foreign Direct Investment (FDI) for economic sustainability assessment are being explored. For comprehension of the project the Option Pricing Model (OPM) using the Black-Scholes model applied for model performance. The applicability of the model requires two Monte Carlo simulations to satisfy a Markov process and a Wiener process to determine the position of the buyer’s market. Real options valuation can be influenced by the volatility of cash outflow, as well as the volatility of cash inflow. The real options valuation method proposed in this study contributes to the literature in applying the model, taking into consideration investors that maximize project profitability for economic sustainable development.