Chapter 10

Recent Developments

Arguably, the most significant theoretical development in capital budgeting in recent times has been the attempt to apply the option valuation models originally associated with financial options to investment projects via the concept of “real options,” which essentially introduce learning and flexibility as a source of value. A significant portion of this chapter will be devoted to explaining the potential application of real options theory to specific types of decisions and exploring alternative methods for estimating the value of such options. In addition, other recent innovations emerging from the capital budgeting literature, which include, inter alia, duration analysis, cash flow value at risk, and decision ...

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