-

Abstract

Real options are important factors in investment decision-making process which simple discounted cash flow techniques (DCF) ignore them. In the absence of explicit real option models in practice it is interesting to see how financial managers take into account real option values. Anecdotal evidence suggests that investment decision-makers may use hurdle rates far in excess of their cost of capital to account for the real option values. The findings confirm the real option awareness and the use of real options in an ad hoc heuristic way by financial mangers in the large UK firms.

Keywords

• Capital Budgeting
• Hurdle Rates
• Irreversibility and Uncertainty
• Real Options