Capital Budgeting Technique Selection through Four Decades: With a Great Focus on Real Option

Abstract

Capital budgeting investment decisions involve the use of a large portion of a firm's assets; actually no decision places a company in more jeopardy than these decisions. Often these investments can cost billions of dollars, and require predictions of the future, without a suitable return the very existence of the company can be compromised. This paper aims to provide a review and analysis on capital budgeting techniques from 1970 to 2012 in developing and developed countries regarding the most effective factors on selecting techniques. It also analyzes how industries proceed to more sophisticated techniques during four decades. The most important flaws of traditional methods were criticized to analyze whether adopting a new sophisticated method like real option (RO) could eliminate them. Through an overview on RO domain and its process, the most efficient usage of sophisticated methods was found. Reviewing previous empirical studies on real option adoption give us insight for providing required infrastructures before applying real option process. Our main aim by providing this paper is to help readers make the most appropriate decision about capital budgeting techniques in terms of different factors with a great focus on real option (in the case which real option domain would not be contravened)and fault detecting to remove important obstacles and achieve successful real option implementation.[ABSTRACT FROM AUTHOR]