Document Type

Article

Publication Date

Summer 2008

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.

Publisher's Statement

© 2008 The Association of Accountants and Financial Professionals in Business. Deposited here in compliance with publisher policies.

Publisher's version of record can also be accessed here.

Journal homepage: http://www.imanet.org/resources-publications/management-accounting-quarterly

Publication Title

Management accounting quarterly

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