A foreign investment project of an autoparts firm: Real options versus financial valuation

This study examines the importance of using real options model in the auto industry by means of its application to the case of a direct investment abroad, specifically in Brazil. We use the Black and Scholes and Binomial models. Empirical results show that this is the kind of project that, despite having a negative NPV, should be accepted because of its strategic value, which indicates that the contingent effect of the investment projects, reflected in the volatility of cash flows, are best assessed by the real options model unlike the VPN that does not take them into account.