Evaluating capital investment opportunities: capturing the value of flexibility

The risks inherent in today's healthcare environment make it difficult to predict financial returns from large capital investments or strategic initiatives. Discounted cash-flow financial models are an inadequate means of valuing capital investment opportunities. Real-option analysis includes in the value of a capital investment the ability of management to alter a strategic course or react to marketplace changes. The value of managerial flexibility is higher in an investment opportunity with considerable risk.