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What is traditional capital budgeting analysis? What are its shortcomings? What is real options analysis? What...

What is traditional capital budgeting analysis? What are its shortcomings?

What is real options analysis? What are examples of real options?

How can simulation be used to study real options in projects?

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Expert Solution

The traditional capital budgeting analysis includes the payback period and accounting rate of return method. The discounted cash flow method includes the NPV method, profitability index method and IRR. which are the latest methods. the drawbacks of the traditional capital budgeting analysis are as follows.

* it fails to take into account the time value of money which is a major draw back in the traditional method. and

* it fails to take into account the cash flows that occur after the payback period thus it fails to compare the overall profitability of one project with another project.

* the traditional method short coming is not to take into account the complexity of the cash flows that can occur with capital investments.

Thus these are the short coming of the traditional capital budgeting analysis the pay back period. often its supplemented or supported by the NPV and IRR to evaluate a project.

jeff jeffy answered 2 years ago
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