The Smith Company: a case on capital budgeting and real options

Abstract

PurposeThis paper aims to provide upper‐level accounting and/or finance students with a review of the intricacies of option pricing, discounted cash flow (DCF) capital budgeting decision models, various types of real options, how risk analysis of long‐term capital investments can be facilitated by explicit consideration of real options, and the role of sensitivity analysis in the analysis of capital investment projects with real options.Design/methodology/approachThe paper describes a fictional company facing a risky capital investment proposal. Students evaluate the investment proposal using traditional DCF analysis (i.e. the net present value method), and then re‐run the analysis by incorporating the existence of real options into the analysis of the proposed investment. Finally, students see the value of using Crystal Ball software for conducting sensitivity analysis as part of the decision‐making process.FindingsThere are two primary conceptual lessons that students realize by completing this educational case: real‐options analysis is a conceptually correct and robust way to explicitly deal with project uncertainty, and failure to explicitly consider real options in the analysis of capital investment projects may result in suboptimal decision making.Originality/valueThis case covers all major real‐option topics required for the certified management accountant exam. Further, the case fills a void in the literature of accounting education as this literature pertains to the availability of case material regarding the use of real options as an extension to conventional capital budgeting techniques.

‘Pleasure’, ‘Vice’ or ‘Profession’: Myriad Social Perceptions and Representations of Prostitutes in Colonial Calcutta

“…20 Shibnath Shastri also noted that when a group of singers and dancers from the north and west came to town, it was a matter of great pride to have the rich in attendance at their performances. 21 Notably, the majority of the baijees in this city in the early nineteenth century were non-Hindus. They were a heterogeneous group that included Anglo-Indians, Jews, and Armenians, although the majority were Muslims.…”

An Overview on Vegetable Origin Drugs Used in Ayurveda, Included in the Schedule (E1) of the Drugs and Cosmetics Rules, 1945

“…can be applied. [16] Root for decoction-1-3 gm Leaf churna -250-750 mg Stem bark churna-0.5-1 gm Kshira [17] -¼ -¾ gm Arka lavana, Arka ksheeradi lepa…”

“…Ayurvedic literature classified poisonous drugs into Visha and Upavisha based on their potency and lethality. [19] Upavishas are less toxic in nature and not so lethal but produce toxic symptoms. Among the vegetable drugs in Ayurvedic system, mentioned under Schedule (E1), Vatsanabha and Shringivisha belong to the category of Visha while Ahiphena, Arka, Bhallataka, Bhanga, Dhattura, Gunja, Jayapala, Karaveera, Langali and Vishamushti belong to the group of Upavishas.…”