Real Option Analysis - A Study of Implementation Impediments -

Abstract

In this essay, we study the capital budgeting method called real options analysis. The method is, by many researchers, considered superior to other capital budgeting methods since it is able to value flexibilities within projects. Among practitioners, however, the method has not had a large breakthrough, although it has existed for almost three decades. This indicates that there are problems with the method impeding the implementation and these problems are the interest of this essay. We have conducted a literature study, where we try to create a picture of what the academic world thinks are the largest problems with the method. We have also conducted an interview study, where we interviewed companies, in the Gothenburg region, to get a picture of what they look for in a capital budgeting method and what problems real options analysis would experience in the companies. Our studies have made us identify a number of different problems that we think have to be solved before the method will become more widely used. These problems include both technical problems, concerning valuation of the options, as well as organisational problems, concerning changes in the capital budgeting process, demanded by a real options analysis framework.