Why doesn DCF work for flexible decision-making?
Most companies use some form of discounted cash flow to value investment opportunities. However, using the discounted cashflow approach to value contingent investment decisions, the kinds of decisions facing managers, produces a “show-stopping” dilemma. Consider the option to abandon. If the option is used, the asset is abandoned and there is no further risk. If the option is not used, there is risk to holding the option and the asset. No single discount rate can bring these different risks back to the present, and this problem has no remedy inside the discounted cash flow framework.
