Current Decisions And Deferred Decisions In Capital Investment-A Comparative Study

Capital investment is essential for the survival of any enterprise. The current decision approach represented by the NPV method ignores the irreversibility and deferability in project decisions. This paper introduces the theory of physical option and its applications in the deferred decisions in long term capital investments, and offers a comparative study in actual scenario of long term investments. We believe that for urgent projects that require quick decisions and on the back of relatively clear and complete information, the current decision approach should apply due to its obvious advantages of being straightforward, easy to practice and quick in decision-making. For project involving many uncertainties or vagueness, deferred decision proves to be a more scientific approach in decision making as it overcomes many weaknesses in traditional decision making approaches, and is able to accurately determine the value of the projects through the application of physical options.