Managing risk and uncertainty in complex capital projects
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In evaluating capital budgeting decisions, quantitative approaches, such as traditional discounted cash flow modeling and real options valuations, are useful when there is a presumed probability distribution for the future forecasted outcomes or for when there are lower levels of uncertainty. As uncertainty increases and forecasting becomes difficult, the value of financial modeling techniques decreases. Borrowing from the strategic management literature, we argue that it may be useful to employ a qualitative approach to evaluate capital projects when faced with high levels of uncertainty. In order to illustrate our argument, we use a derivative of scenario planning and qualitative real options to evaluate non-quantifiable factors in a project for the National Ignition Facility. © 2004 Board of Trustees of the University of Illinois. All rights reserved.
author list (cited authors)
Alessandri, T. M., Ford, D. N., Lander, D. M., Leggio, K. B., & Taylor, M.