Thursday, November 25, 2010


Management Flexibility and Commitment for Investment Decisions

Most often we hear managers and investors saying
  • “Our plans and decisions are always clouded by uncertainty”
  • “Investment commitments have tremendous competitive value, although you have to pay a cost”
  • “There is nothing like now never; we become wiser by writing for uncertainty decisions”
  • “Flexibility helps to capture future opportunities”
  • “Relinquishing an on-going project or liquidating a business may be a good opportunity to bail out a firm”

They consider these issues as strategic. In practice, managers and investors consider strategic aspects of investment projects as critical for making the investment decisions. They will always like to have right to expand; right to exit; right to exchange investment since these rights provided flexibility to managers. Because of uncertainty, managers Endeavour to build flexibility into a capital investment. Managers also like to commit doing things in response to competitive, technological, or environmental forces. They like to do things differently from others. These commitments that may be contingent upon certain events taking place provide managers with flexibility, operating freedom and opportunities to proactively gain an advantage over competition. The discounted cash flow method of investment analysis is unable of handling managerial flexibility and commitments and other strategic aspects in investment projects.

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