Capital Budgeting M4A1 Peer Discussion Peer 1 Budgeting with Real Options Christopher Copenhaver posted Apr 5, 2018 7:28 PM Memorandum From: Chris Copenhaver To: XYZ, Manager Subject: Budget with Real Options When you are trying to recognize the profitability of most projects, the success of that project is unknown. There are different approaches that a company can take and many recommendations that a company can utilize. The well-known recommendation is using the NPV method. With the NPV method a company can calculate the project using the cash outflow and inflow for the duration of the project along with the cost of capital. During this, the company can see whether there is going to be a positive NPV, which the company should accept, or a negative NPV and the company should reject. There are other methods that a company can use besides the NPV method. They can use the IRR method, profitability index, and the payback period can also be filtered in to ensure they are making the proper decisions. A company can also use the real option approach. With this, there are other factors that can be instilled in the findings. Say there are delays in the project, these can be factored into the projects calculations.  Sometimes being able to show the delays can result in people considering this to be a better method. However, this method is a very complex and should only be utilized if the project is large enough, this way results may be shown. Companies tend to go with a project that shows a greater probability success rate than that of an assumed one. In most cases when a company plays out the scenarios, they are sure that the project they chose will be 100% worth the option of going ahead with and completing the project however, there are sometimes uncertainties and the value beforehand is 0%. A way to look at this is: Value of real option = the value of knowing the certainty - the value of the results not known.                                                           When this happens, the value with the real options has an increase. When and if this option is not used, the advantage of utilizing this option is not calculated in and it ends up underestimating the NPV. It is beneficial to a company to understand and to determine the usefulness of the value of real option and let it aid them in making their best decision. References Van Putten, Alexander B. (Dec, 2004). Making Real Options Really Work. Retrieved from https://hbr.org/2004/12/making-real-options-really-work Mun, Jonathan. (2006). Real Options Analysis versus Traditional DCF Valuation in Layman’s Terms. Retrieved from https://pdfs.semanticscholar.org/2f51/e0e143a4a2c166e0c8b84ff41938d831ab2e.pdf Peer 2 M4A1 Loranda Williams posted Apr 7, 2018 8:05 PM      MEMO To: LND Enterprise From: Loranda Williams Date: 7 April 2018 RE: Real Option Budgeting The real option is not the unique financial instrument, but it allows a company to have genuine selections as well as opportunities f ...

1. Capital Budgeting M4A1 Peer Discussion
Peer 1
Budgeting with Real Options
Christopher Copenhaver posted Apr 5, 2018 7:28 PM
Memorandum
From: Chris Copenhaver
To: XYZ, Manager
Subject: Budget with Real Options
When you are trying to recognize the profitability of most
projects, the success of that project is unknown. There are
different approaches that a company can take and many
recommendations that a company can utilize. The well-known
recommendation is using the NPV method. With the NPV
method a company can calculate the project using the cash
outflow and inflow for the duration of the project along with the
cost of capital. During this, the company can see whether there
is going to be a positive NPV, which the company should
accept, or a negative NPV and the company should reject. There
are other methods that a company can use besides the NPV
method. They can use the IRR method, profitability index, and
the payback period can also be filtered in to ensure they are
making the proper decisions.
A company can also use the real option approach. With this,
there are other factors that can be instilled in the findings. Say
there are delays in the project, these can be factored into the
projects calculations. Sometimes being able to show the delays
can result in people considering this to be a better method.
However, this method is a very complex and should only be
utilized if the project is large enough, this way results may be
shown. Companies tend to go with a project that shows a greater
probability success rate than that of an assumed one.

2. In most cases when a company plays out the scenarios, they are
sure that the project they chose will be 100% worth the option
of going ahead with and completing the project however, there
are sometimes uncertainties and the value beforehand is 0%. A
way to look at this is:
Value of real option = the value of knowing the certainty - the
value of the results not known.
When this happens, the value with the real options has an
increase. When and if this option is not used, the advantage of
utilizing this option is not calculated in and it ends up
underestimating the NPV. It is beneficial to a company to
understand and to determine the usefulness of the value of real
option and let it aid them in making their best decision.
References
Van Putten, Alexander B. (Dec, 2004). Making Real Options
Really Work. Retrieved from https://hbr.org/2004/12/making-
real-options-really-work
Mun, Jonathan. (2006). Real Options Analysis versus
Traditional DCF Valuation in Layman’s Terms. Retrieved from
https://pdfs.semanticscholar.org/2f51/e0e143a4a2c166e0c8b84ff
41938d831ab2e.pdf
Peer 2
M4A1
Loranda Williams posted Apr 7, 2018 8:05 PM
MEMO
To: LND Enterprise
From: Loranda Williams
Date: 7 April 2018
RE: Real Option Budgeting

3. The real option is not the unique financial instrument, but it
allows a company to have genuine selections as well as
opportunities for an organization to take advantage as well as a
realization of an investment (Investopedia, 2018). The real
option may possibly be complicated to estimate and establish
(Investopedia, 2018). The real option recognizes the value of
being flexible and alternative even though the values cannot be
measured (Investopedia, 2018). Investopedia states that “Real
options are choices a company’s management makes to expand,
change or curtail projects based on changing economic,
technological or market conditions. Factoring in real options
impacts the valuation of potential investments.”
When an organization predicts the outcome of the future
revenue due to an investment the company underestimated the
NPV, therefore, it increases the cash flow of an organization. It
more beneficial for an organization to continue to produce the
product. The company should not abandon a project especially
if the outcome is more than the initial investment of the project.
The best capital-budgeting analysis to be used with real-
world option is the simulation analysis. I chose this analysis
because the real-option basically does the same thing. In
Boundless Finance it states “ The commonality in applying
option-pricing models for real assets and for financial securities
is that the future is uncertain.” Because of the uncertainty of a
market, the real-option can be used to decide whether or not the
project should cease by allowing management the flexibility to
make a future decision for a business (Boundless Finance, n.d.).
Reference:
Investopedia, (208), Real Options, Retrieved from
https://www.investopedia.com/terms/r/realoption.asp
McDonald, R., L., Real Options and Rules of Thumbs in Capital
Budgeting. Retrieved from
http://www.kellogg.northwestern.edu/faculty/mcdonald/htm/real
opt.pdf
Boundless Finance, (n.d.), Other Considerations in Capital

4. Budgeting, Retrieved from
https://courses.lumenlearning.com/boundless-
finance/chapter/other-considerations-in-capital-
budgeting/
Joseph M
Diversity contributes to firm performance in three primary
ways: recruiting access, market access, and input diversity
(McMahon, 2010). Recruiting access provides employers with a
broadened pool of individuals with a more expansive list of
backgrounds to fill roles. Market access is obtained through
diversity by employing individuals from cultures which can
relay information about their in-group for marketing potential.
Finally, input diversity is obtained through diversity simply by
the increased number of unique viewpoints within the
organization. While input diversity is likely to influence any
organization as inclusion will inevitably lead to those
individuals contributing ideas which will be derived from their
experience which is unique from the dominant culture, the
influence of recruiting access is largely dependent on the
employment needs of the organization and market access
dependent on the need for market pursuit (e.g. if the
organization has a product which has no relevant possibility to
market to an out-group, there is no need for employees of that
out-group with regards to their ability to provide market
access). For this reason, it should be considered that input
diversity is the most consistent influencer of organizational
performance as it is not contingent on potential marketing
opportunities or labor markets as is the case with market access
and recruiting access, respectively.
While not as ubiquitous as input diversity, market
access and recruiting access, so long as their relevant
contingencies are in effect, can contribute significantly to a
firm’s profitability. In the case of market access, the needs of

5. multinational organizations have been found to benefit greatly
from increased diversity resulting from their unique and
relevant cultural insights (Hajro, et al., 2017). When
considering this form of diversity it is important to note that
unlike the other two benefits, pursuing the advantage is not
simply a matter of seeking those of diverse backgrounds
generally for their out-group status but rather pursuing specific
and relevant out group statuses such that a multinational
pursuing markets in sub-Saharan Africa would not consider a
Chinese applicant in order to yield such an advantage. The
benefit of recruiting access differs from input diversity and
market access as it is not pursuant of diversity for its own sake
but rather the result of openness to diverse hiring. Benefits
from diversity in this regard are difficult to observe unless a
ban has been lifted such as with the acceptance of open
homosexuals in the military (Jones & Koshes, 1995). The
benefit of their inclusion in this context is that their inclusion in
the pool of applicants will increase in size and generally
increase the quality of employees selected should any of those
additional applicants prove to be amongst the most qualified in
the full population of applicants.
While the difficulties in implementing inclusion
policies are vast, they are often driven by the individual groups
being included. Rather than attempt to formulate a complete
list of such difficulties two general trends will be explored.
The first of these trends will be the difficulty of inclusion
without compromising the benefits of diversity with
assimilation and the second being the limits on establishment of
group norms that diversity provides.
While assimilation into the dominant culture may be
the ideal within certain contexts, for the goals of input diversity
and diversity driven market access it is largely disruptive. This
detriment occurs mostly in organizations with an authoritative
view of the knowledge base (McMahon, 2010) and stands to
erode gains in input diversity by placing a greater value on
agreeableness and homogeny than independent thought as well

6. as eroding gains in diversity driven market access since, while
diversity employees may retain their relevant statues, the
expressed cultural viewpoint which is expected to provide this
access will be suppressed. This erosion of benefits of diversity
necessitates an organization seeking either of these benefits to
either constantly seek to increase diversity within their
workforce or to actively suppress the assimilation of employees
that possess a unique background in order to preserve their
unique traits.
Pursuant to organizational cohesion and survival are
the establishment of group norms which serve to provide a
framework of behavior for all participants as a generally
acceptable minimum (Feldman, 1984). These norms, being the
result of an unspoken system of bargaining within a group over
time, tend to reflect the dominant culture of that group and as
such largely discount voices of descent, especially in the case of
those which join the group after the norms have since been well
established. While this late entry into an established set of
rules may not provide difficulty to members of the dominant
group due to similarities in culture, those of more unique
backgrounds may have difficulty in adapting to the norms,
especially when maintaining the unique traits which, in the
cases of input diversity and diversity driven market access,
provide value to the organization as a whole.
Resources
Feldman, D. (1984). The development and enforcement of
group norms. Academy of Management Review, 9(1), 47-53.
Hajro, A., Gibson, C. B. & Pudelko M. (2017). Knowledge
exchange process in multicultural teams: linking organizational
diversity climates to teams’ effectiveness. Academy of
Management Journal, 60(1), 345-372.
Jones, F. D. & Koshes, R. J. (1995). Homosexuality and the
military. The American Journal of Psychiatry, 152(1), 16-21.
McMahon, A. M. (2010). Does workplace diversity matter? A
survey of empirical studies on diversity and firm performance,

7. 2000-09. Journal of Diversity Management, 5(2), 37-48.
Cecelia L
Diversity can have a positive or negative influence on an
organization’s performance. Most of the influence is tied to
upper management’s perceptions of having a diverse group. If
it is felt a diverse group is valuable, then it will be. Nielsen &
Nielsen (2013) believe a nationally diverse top management
team may have positive and negative results on performance and
suggest more research in this area should be considered. They
tested their ideas on over 100 companies in Switzerland and
found that nationality diversity is a strong indicator of strong
corporate performance as well as the length of time a nationally
diverse Board is together also has a positive effect.
Much of today’s diverse issues can be related to trust.
Many people of diverse groups have not been treated fairly in
the past, and they may be leery of accepting the “company line”
that they are truly interested in being a diverse organization.
Trust has many forms and definitions. Dispositional trust, also
known as the propensity to trust, is a personality-based
inclination to trust (Colquitt, Scott, & LePine, 2007). This type
of trust is representative of childhood experiences (Caspi, 2000;
Rotter, 1971). This is the customary way most of us learn how
to trust; it is based on our experiences.
There is also Dyadic trust which is developed through
repeated interactions with others (Leana & Van Buren, 1999;
Mayer et al., 1995). In other words, we learn who we can trust
and who we can’t. Impersonal trust, also known as social trust,
is the trust we have in ourselves to handle social situations and
to determine if we can believe in what others are implying
(Stolle & Rochon, 2001). We use all three of these types of
trust daily in determining what and who to trust. When all

8. organizations finally and truly believe diversity really does
bring more opportunity for the firm, maybe there will be more
trust. “Social trust in the workplace is positively related to
their social interaction diversity in the community, in both
collectivistic and individualistic cultures” (Cui et al., 2018).
Caspi, A. (2000). The child is father of the man: Personality
continuities from childhood
to adulthood. Journal of Personality and Social Psychology, 78,
158-172.
Colquitt, J. A., Scott, B. A., & LePine, J. A. (2007). Trust,
trustworthiness, and trust
propensity: A meta-analytic test of their unique relationships
with risk taking and
job performance. Journal of Applied Psychology, 92, 909-927.
Cui, V., Vertinsky, I., Robinson, S., & Branzei, O. (2018). Trust
in the workplace: The role of social interaction diversity in the
community and in the workplace. Business & Society. (57(2),
378-412. DOI: 10.1177/0007650315611724
Leana, C. R., & Van Buren, H. J. (1999). Organizational social
capital and employment
practices. Academy of Management Review, 24, 538-555.
Nielsen, B.B. & Nielsen, S. (2013), Top management team
nationality diversity and firm performance: a multilevel study.
Strategic Management Journal, Vol. 34(3) 373-382.
Stolle, D., & Rochon, T. (2001). Are all associations alike?
Member diversity, associational
type, and the creation of social capital. In B. Edwards, M. W.
Foley &
M. Diani (Eds.), Beyond Tocqueville: Civil society and the
social capital debate
in comparative perspective (pp. 143-156). Hanover, NH:
University Press of New
England.