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.
Management accounting quarterly
Stout, D. E.,
Xie, Y. A.,
Improving capital budgeting decisions with real options.
Management accounting quarterly,
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