Article ID: | iaor200968903 |
Country: | United Kingdom |
Volume: | 5 |
Issue: | 3 |
Start Page Number: | 349 |
End Page Number: | 362 |
Publication Date: | May 2009 |
Journal: | International Journal of Operational Research |
Authors: | Troutt Marvin D, Ghosh Suvankar, Weinroth Jay, Li Xiaolin |
Keywords: | capital budgeting |
Two emerging methodologies for capital budgeting are Real Options (RO) and Economic Value Added (EVA). Embracing EVA or RO is not a small undertaking for a firm. Given the extent of the change involved, we recommend that firm adopt these new approaches sequentially. We develop a Methodology Adoption Decision Model (MADM) for determining which methodology a firm should adopt first. The MADM focuses on the theoretical soundness and the practical applicability of the methodology. We conclude that EVA is more likely to be embraced by the industry than RO. We therefore recommend that management first focus on EVA adoption.