Template-Type: ReDIF-Article 1.0
Author-Name: Mehrdad Karami
Author-Name: Farshid Ahmadi Farsani
Title:  Real Option Method and Escalation of Commitment in the Evaluation of Investment Projects
Abstract:  <b>Problem statement:</b> This study applies an experimental method to find out whether using the real option method along with the discounted cash flow techniques can reduce the decision-makers&rsquo; Escalation of Commitment (EC hereafter) or their desire to keep up their commitment to a failed project. <b>Approach:</b> The real option method used for the evaluation of long-term projects also measures the flexibility value which may be produced during the implementation of the project. <b>Results:</b> The results indicate that those who use the real option method show lower EC to a failed project than those who merely use the net present value method. <b>Conclusion/Recommendations:</b> The major conclusion might be that using the real option method in capital budgeting can affect the users&rsquo; behavior and decisions and lead to better decision-making in the long-term projects. In view of the fact that long-term investment projects are costly and time-consuming, a greater need is felt for better methods of evaluating such projects and, in consequence, researchers should also consider the other affective aspects of using real method options on the users&#039; behavior and decisions.
Keywords: Investment projects evaluation, economic feasibility study, real option method, capital budgeting, investment option, personal justificatory, social context, dependent variables, measurement tools
Journal: American Journal of Economics and Business Administration
Pages: 473-478
Volume: 3
Issue: 3
Year: 2011
Month: September
DOI: 10.3844/ajebasp.2011.473.478
File-URL: https://thescipub.com/pdf/ajebasp.2011.473.478.pdf
File-Format: Application/pdf
File-URL: https://thescipub.com/abstract/ajebasp.2011.473.478
File-Format: text/html
Handle: RePEc:abk:jajeba:ajebasp.2011.473.478