Abstract Of late, experts have expressed concerns over alleged inefficiency of traditional cash flow models such as discounted cash flow model in capturing the value of the options entrenched in most actions of the corporate. According to the experts mainly academics and practitioners, the options need to be valued and considered explicitly since their value can be significant. Real options when considered can help in adding value to most acquisitions and investments that would otherwise be invalid. Though many actions have real options entrenched in them, there are conditions that must be met for real options to be valuable. To allay the shortcomings of traditional cash flow model, real options theory is used instead. An example of such problems is where a project’s net present value fails to capture the values of the options to expand, delay or even abandon an ongoing project (Baker etal, 2011). Also, discounted cash flow valuation model does not consider other options that a company may own such as rights to natural reserves, patents and licenses. Moreover, it fails to measure the option to control and liquidate a company owned by shareholders. Other strategic options open for consideration by an acquiring firm are often ignored during valuation. Real options dominate every aspect of decisions made by business managers. However, it would be prudent to understand what conditions make them to be valuable. Introduction Real options refer to a relatively new financial analytical tool that helps investors and managers to select market valuations that reflect a blend of businesses that are already known together with the value of business opportunities that are likely to arise. The Black-Scholes model is one of the best known forms of financial option theory that is applied through real options. There is need for managers and investors to understand how to take advantage of rapid changes that are occurring in economic world. This need if fulfilled by real options which gives them requisite insights into strategic investments and businesses. Real options are viable where particular conditions are met. Managers who are keen on maintaining the status quo will certainly miss the opportunities availed by this analytical tool. Economic changes occurring from time to time are a fertile breeding ground for real options. Businesses with adequate capital, reputable and intelligent management are more likely to fare well with real options. This is so because such managers will be capable of identifying, understanding and creating real options and eventually put such knowledge into practice. Businesses that enjoy economies of scale are highly likely to benefit from real options since they have access to richest opportunities and best information (Karami and Farsani, 2011). By juxtaposing real options to the traditional valuation model, an investor can fully appreciate the power of this analytical tool. Real Options versus Discounted Cash Flow Model Real options being an extension of financial option theory brings into consideration things such as options that are not related to finance in any way or options that are real. Real options give a company the right but not the obligation to create an investment whose va