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The Role of Real Options in Capital Budgeting: Theory and Practice-super-1


  • Robert L. McDonald


Most discussions of capital budgeting take for granted that discounted cash flow (DCF) and real options valuation (ROV) are very different methods that are meant to be applied in different circumstances. Such discussions also typically assume that DCF is "easy" and ROV is "hard"-or at least dauntingly unfamiliar-and that, mainly for this reason, managers often use DCF and rarely ROV. This paper argues that all three assumptions are wrong or at least seriously misleading. 2006 Morgan Stanley.

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  • Robert L. McDonald, 2006. "The Role of Real Options in Capital Budgeting: Theory and Practice-super-1," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(2), pages 28-39.
  • Handle: RePEc:bla:jacrfn:v:18:y:2006:i:2:p:28-39

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    References listed on IDEAS

    1. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25.
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    Cited by:

    1. Arif, Salman & Marshall, Nathan & Yohn, Teri Lombardi, 2016. "Understanding the relation between accruals and volatility: A real options-based investment approach," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 65-86.
    2. Tor Brunzell & Eva Liljeblom & Mika Vaihekoski, 2013. "Determinants of capital budgeting methods and hurdle rates in Nordic firms," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 53(1), pages 85-110, March.
    3. Richard A. Brealey & Stewart C. Myers & Franklin Allen, 2008. "Brealey, Myers, and Allen on Real Options," Journal of Applied Corporate Finance, Morgan Stanley, vol. 20(4), pages 58-71.
    4. Stewart C. Myers & James A. Read, Jr., 2012. "Real Options, Taxes and Financial Leverage," NBER Working Papers 18148, National Bureau of Economic Research, Inc.

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