Managerial Judgment Factors and the Real Options Approach in the Investment Appraisal Process : Evidence from UK Automotive Firms

This paper examines the extent to which the Real Options Approach (ROA) and Managerial Judgement (MJ) factors are deployed in the Investment Appraisal Process (IAP).It draws on a 73-firm survey aimed at finance directors of British Automotive Components Manufacturers (BACMs) to set out the relative importance of the strategic approach (ROA informed by MJ) and formal investment appraisal techniques: Pay back (PB), Return on Capital Employed (ROCE), Internal Rate of Return (IRR) and Net Present Value (NPV) when making Strategic Investment Decisions (SIDs) with growth options. The findings from the survey show the absence of the formal adoption of the ROA in the IAP. However, the impacts of the growth options regarding the deployment of MJ in the IAP are clearly evident. The analysis shows that MJ is considered when assessing both investments with growth options and risky projects