Abstract
This study explores the implementation of an integrated capital budgeting visual mapping framework comprised of both Discounted Cash Flow (DCF) and Real Options Analysis (ROA) techniques. Physical asset investment decisions are based largely on rigid discounted cash flow tools which provide untimely and incomplete decisional criteria. While literature outlines the widespread use of traditional DCF techniques, it nevertheless reveals extensive limitations, including its static inflexibility and slow-to-evolve framework. ROA is a more recent valuation tool based on stock option theory. It brings into account added value found in the flexibility of managerial decision-making and uncertain conditions. This study implements a combined DCF and ROA capital budgeting tool within a Physical Asset Management (PAM) environment. The validity of the framework is realised through an industry-relevant case study presented by a South African mining company.
Highlights
Behind every major investment decision lies some calculation of what that investment is worth
According to Baker (2011), Discounted Cash Flow (DCF) analysis does not take into account the realistic valuation of an investment, as it fails to account overtly for the value of real options that are integral to capital budgeting
The expanded Net Present Value (NPV) consists of the sum of traditional NPV obtained by using DCF techniques and the value instilled in real options provided by the investment opportunity
Summary
Behind every major investment decision lies some calculation of what that investment is worth. As pointed out by Ford, Lander and Voyer (2004), options are strategies that include a right, without an obligation, to take specific actions in the future, at some cost This is contingent on how initially uncertain conditions evolve. SAJEMS NS 17 (2014) No 2:194=206 for the value that real options can bring to within PAS 55 and a physical asset management capital budgeting is its applicability to systems framework. Portfolio of assets and asset systems (type, criticalities, condition, performance) When it comes to the Life Cycle Activities section of PAS 55, one of the primary requirements is the area outlined as “Acquire/ Create” shown in Figure 1 and adapted from BSI (2008:14). The value and benefits can be seen in the use of a supplementary real options framework instead of the often rigid and inflexible conventional DCF techniques employed
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