The Evaluation of Investment Projects - Assignment Example

The study in question discusses how the “real option” method, as well as the “discounted cash flow” techniques, can reduce the buyer’s escalation of commitment (EC).  This is important due to the fact that the authors claim that it is verifiably proven that by reducing a buyer’s EC, it is possible to tangentially reduce their desire to keep a commitment to an otherwise failed project/product.  This measurement of expectation as it relates to perceived yield is a primal motivator with respect to what utility the purchaser/buyer intends on receiving from a given project/product.  In this way, understanding the research project helps the authors to find important ways to either reduce or increase the EC of the buyer.  Furthermore, the crux of the matter, as the authors relate it, hinges upon the differential that is noticed between the aforementioned “real option” as compared to the “discounted cash flow”.   Regardless of the causal mechanisms, the authors argue that understanding EC as a function of behavior and what triggers it are key concerns for the operations and decision-making structures that many organizations and individuals employ on a daily basis.

Methods

The methodology that the study employed was concentric upon a group of 80 financial managers who were drawn from a diverse group of companies.  For purposes of the study, the participants were all graduates in either accounting or management.  As a means to ensure that the participants all had a modicum of experience, the participants were only selected from those who had a minimum average experience of around 7 years on the job. 

As a means of answering the questions associated with the research questions, the researchers distributed among these 80 participants a questionnaire which was divided into 3 separate and distinct subsections.  The first section introduced the research and required the participants to give their general information; including age, sex, degree, the field of expertise, etc.  Likewise, the second part was divided into two subsections of its own.  The first of these subsections offered a brief explanation of the capital budgeting methods (real option or net present value).  The second subsection elaborated upon how the former was calculated; giving examples and showing the methodology/formulation.  Similarly, the third section consisted of three subsections of its own.  The first of these subsections helped to describe the hypothetical project to the participants as a way of seeking to gain shareholder buy-in.  The second subsection sought to obtain a quantitative measurement based upon the first with respect to whether they would seek to abandon or salvage a given project on a scale of 0-100 (Karimi et al 478).  Likewise, the third subsection required the participants to answer 9 multiple choice questions with a 0-5 rating concerning their hypothetical choices that have been previously determined within the other sections.

Description

Although previous studies have worked to show that the use of real options methods for the purpose of evaluation tends to yield better results, the hypothesis that was tested within this study helped to reflect a slightly different result.  This is no doubt due in part to the participants who were involved.  Whereas previous studies have relied almost exclusively on university students in order to populate their studies, this particular study relied exclusively on those that have spent an average of 7 years within the industry, and likely this factor more than any other has helped to differentiate the results that were seen.  This helps to necessarily present the researcher with a clear and unavoidable juxtaposition of actual real-world experience that has helped to inform the research question.

Evaluation

I found this project to be contextually interesting but the research model and statistical generation that was reported could have been much better written as a way to engage the reader/researcher with the findings in a far more effective manner.  Additionally, I found the study highly useful due to the fact that they were able to find a new way to measure these variables.  Rather than solely relying on the groups of college students to help the researchers draw the inference, the inclusion of seasoned experts within their respective fields only served to provide a strong sense of ethos to the study.  Furthermore, the topic itself is one of primal importance as the decision-making structure is something that is hard to measure and even harder to categorize.  Regardless of some of the shortcomings in descriptive qualities and overall interest, the researchers have completed an exemplary piece of research that is not only well documented but fully illustrated.