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Fundamentals of Financial Management, Third Edition by Vyuptakesh Sharan

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6.5 MANAGERIAL OPTIONS AND THE CASH FLOW

The traditional capital budgeting theory does not deal with the actions to be taken after the project has been accepted and subsequently implemented. However, in real life, there is every possibility of changes in the cash flow from that originally anticipated. If the project does not perform well after two years, it may be abandoned. Again, if it performs well but the demand suddenly falls, the productive capacity will need contraction. On the contrary, the demand may suddenly rise needing expansion in the productive capacity. Again in other cases, investment is postponed just to have more information from the market. The efforts of the managers to respond to these changing circumstances are known as ...

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