Flexibility in Investments: Exploratory Survey on How Finnish Companies Deal with Flexibility in Capital Budgeting

Abstract

Flexibility is an important issue when investments are being planned and valued. How flexibility inherent in investments is utilised and exploited is, therefore, of great importance to the accuracy of the plans and the valuation. This paper describes an exploratory survey, done with leading Finnish companies, exploring the use of Real Option Valuation (ROV), and the methods that Finnish corporations use to take flexibility into consideration, when planning and valuing investments. We found that real options exist in Finnish investments, but there are very few companies that have an established methodology of identifying, categorizing, or valuing them. We also found that Finnish managers have mixed views about the value of flexibility in investments. Very few Finnish managers seem to be aware of research done in the field, but most seem to have an intuitive understanding of how different variables affect the value of flexibility in an investment.flexibility; real options; capital budgeting