Question

Based on the study by Baker, Dutta and Saadi (2011), why is the real options approach not a widely used capital budgeting tool in Canada? What are the implications for this finding on the Canadian economy as a whole?

Answer 1

Real options is not a widely used capital budgeting tool in Canada due to the complexity of real options, lack of expertise or knowledge, the assumptions required are very unrealistic, lack of usability in business, requires too many internal resources.   Although real options are better than DCF among the financial valuation techniques, they are difficult to be used in a business because of the complex nature and the lack of expertise. According to the study by Baker, Dutta and Saadi (2011), forms which have their CEO's as MBA are less prone to apply real options techniques in valuation. The technique is currently not very popular is because it does not get the support from the top management. It is imperative that the top management acquires the necessary skills or hire external consultants or build up the expertise internally. As a result, real options has become a part of MBA textbooks in Canada. On the economy as a a whole, not using real options has prevented businesses to take better financial decisions. For example, Air Canada (an example cited in the paper) could use real options for its expansion plan but other companies do not have the expertise to use real options in order to make better financial decisions.