Sri Wahyu, Kuntjoro Adji Sidarto, Devni Prima Sari, Nur Agustiani
This study aims to perform investment appraisal and its mathematical process using Least Square Monte Carlo (LSM) simulation with real options approach. This approach estimates the Net Present Value (NPV) and option value of the project, offering a comparison with commonly used methods such as Discounted Cash Flow (DCF) which uses a single discount factor. Businesses with high uncertainty require methods that accommodate uncertainty and managerial flexibility in investment decisions. LSM simulation, which consists of three stages - price trajectory simulation, cash flow calculation based on price simulation, and determination of NPV and project options - enables more comprehensive investment appraisal. The results of this study show that LSM simulation with the real options approach is able to generate a positive NPV when DCF method generates a negative NPV, reflecting the advantage of LSM in capturing market dynamics and provides a more accurate estimate of the value of investment projects. © 2026 Author(s).
Department of Mathematics, Universitas Negeri Padang, West Sumatera, Padang, Indonesia; Department of Mathematics, Institut Teknologi Bandung, West Java, Bandung, Indonesia; Institut Pertanian Bogor University, West Java, Bogor, Indonesia
