Capital investment decisions are among the most important strategic decisions a company can make. Twenty years ago, managers began to realise that the traditional capital spending decision techniques such as discounting cash flow (DCF) were based on estimated revenues and costs and hence not appropriate in an uncertain arena. It was apparent that flexibility was important and that the real options analysis rewarded flexibility. Over time, managers have tested various capital budgeting techniques and in this paper I shall compare and contrast these tools and conclude whether or not new methods are in fact superior to the traditional ones.

The term real options originally came from Stewart C. Myers of M.I.T. in 1977. He went on to produce a book in which he dedicates a whole chapter to the theory. According to Brealey and Myers (2001), the first to recognise the value of flexibility was Kestor (984) in an article in the Harvard business review. Following that it began to be incorporated in corporate financial strategies, shown to have a range of ap

Some topics in this essay:
ARR Accounting/Average, Bealey Myers, IRR NPV, Enron Real, Elan Ireland’s, Alexandre Triantis, Brennan Schwartz, Applications NPV, IRR Lending, Bain Co, real options, rate return, traditional tools, cash flow, traditional methods, capital budgeting, real option, et al, et al 2003, investment decisions, future cash, capital investment decisions, real options approach, yao et al, discounted cash flow,