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| Author: | Feinstein, S. P. Lander, D. M. |
| Title: | A better understanding of why NPV undervalues managerial flexibility |
| Journal: | Engineering Economist
2002 : VOL. 47:4, p. 418-435 |
| Index terms: | OPTIONS NET PRESENT VALUE MANAGEMENT FLEXIBILITY |
| Language: | eng |
| Abstract: | The Real Options paradigm addresses the valuation of managerial flexibility in capital budgeting. This article shows how some projects with real options can be valued using simple and familiar tools-discounting expected cash flows after adjusting the discount rate. Unless the discount rate is adjusted to account for the impact of real options on risk, a traditional net present value (NPV) analysis misses the value of flexibility. By narrowing the gulf between Real Options analysis and more familiar tools, the weighted average discount rate (WADR) approach introduced in this paper may help novices better understand the Real Options paradigm, which subsequently may gain the wider acceptance it deserves. |
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