REAL OPTIONS – THE NEW PARADIGM IN INVESTMENT DECISION MAKING

Authors

Keywords
corporate fnance, capital budgeting, real options, investment decisions, discounted appraisal methods, undiscounted appraisal methods

Summary
Financial theory has long tried to impose discounted cash flows techniques as a revolutionary approach in evaluating investment alternatives, offering a more accurate and complete idea of the potential in creating a value replacing the „Payback period” that has long been used in capital budgeting. Discounting of cash flows had been the main and indisputable paradigm in making investment decisions prior to the emergence of a real options analysis (ROA) - an application of the theory of financial options in capital budgeting. Real options enhance valuation by embedding flexibility in capital budgeting procedures – the ability of firms to react adequately to favorable or adverse changes in the economic environment, competition or markets. Real options analysis is the perfect approach in evaluating long-term investments and it will not be long before it replaces completely the traditional tools in capital budgeting.

JEL: G31
Pages: 11
Price: 3 Points

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