1. Improving Capital Budgeting Decisions: With Real Options.
- Author
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Stout, David E., Yan Alice Xie, and Howard Qi
- Subjects
- *
ACCOUNTANTS , *DISCOUNTED cash flow , *PURCHASING , *AUTOMOBILE leasing & renting , *MANAGEMENT , *HYBRID electric vehicles , *INCOME tax deductions , *TAX credits , *CAPITAL budget - Abstract
In this article we provide accounting practitioners with a primer on how to supplement traditional discounted cash flow (DCF) analysis with real options. We use an example of a rental car company that is considering the purchase of a new car for its rental fleet. Management is trying to decide whether to buy a conventional gasoline-engine automobile or a hybrid vehicle. Within this decision context we illustrate the embedded options the company should consider given uncertainty of a new energy bill offering income-tax credits for the purchase of commercially operated hybrid vehicles. Our step-by-step approach shows how to incorporate these real options formally into the capital budgeting process. [ABSTRACT FROM AUTHOR]
- Published
- 2008