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?

Solutions

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 1 year ago

Next > < Previous

Related Solutions

Capital Budgeting: Estimating Cash: Cash Flow Estimation and Risk Analysis: Real Options DCF analysis doesn't always...

Capital Budgeting: Estimating Cash: Cash Flow Estimation and Risk Analysis: Real Options DCF analysis doesn't always lead to proper capital budgeting decisions because capital budgeting projects are not -Select-activepassiverealCorrect 1 of Item 1investments like stocks and bonds. Managers can often take positive actions after the investment has been made to alter a project's cash flows. These opportunities are real options that offer the right but not the obligation to take some future action. Types of real options include abandonment, investment...

What value does Real Options analysis add to capital investment decisions? In what cases would there...

What value does Real Options analysis add to capital investment decisions? In what cases would there be value in using this technique?

(Real options and capital budgeting) You have come up with a great idea for a Tex-Mex-Thai...

(Real options and capital budgeting) You have come up with a great idea for a Tex-Mex-Thai fusion restaurant. After doing a financial analysis of this venture, you estimate that the initial outlay will be $5.7 million. You also estimate that there is a 50 percent chance that this new restaurant will be well received and will produce annual cash flows of $780,000 per year forever (a perpetuity), while there is a 50 percent chance of it producing a cash flow...

What is the difference between traditional budgeting and beyond budgeting?

Cash Flow Estimation and Risk Analysis: Real Options DCF analysis doesn't always lead to proper capital...

Cash Flow Estimation and Risk Analysis: Real Options DCF analysis doesn't always lead to proper capital budgeting decisions because capital budgeting projects are not -Select-activepassiverealCorrect 1 of Item 1 investments like stocks and bonds. Managers can often take positive actions after the investment has been made to alter a project's cash flows. These opportunities are real options that offer the right but not the obligation to take some future action. Types of real options include abandonment, investment timing, expansion, output...

Capital budgeting and cash flow analysis

Th e Taylor Mountain Uranium Company currently has annual cash revenues of $1.2 millionand annual cash expenses of $700,000. Depreciation amounts to $200,000 per year.Th ese fi gures are expected to remain constant for the foreseeable future (at least 15 years).Th e fi rm’s marginal tax rate is 40 percent.A new high-speed processing unit costing $1.2 million is being considered as a potentialinvestment designed to increase the fi rm’s output capacity. Th is new piece of equipmentwill have an estimated...

Company is considering adding a new line to its product mix, and the capital budgeting analysis...

Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by a MBA student. The production line would be set up in unused space (Market Value Zero) in Sugar Land’ main plant. Total cost of the machine is $350,000. The machinery has an economic life of 4 years and will be depreciated using MACRS for 3-year property class. The machine will have a salvage value of $35,000 after 4 years. The...

Question