Two emerging methodologies for capital budgeting are Real Options
(RO) and Economic Value Added (EVA). Embracing EVA or RO is not a
small undertaking for a firm. Given the extent of the change involved,
we recommend that firm adopt these new approaches sequentially. We develop
a Methodology Adoption Decision Model (MADM) for determining which
methodology a firm should adopt first. The MADM focuses on the theoretical
soundness and the practical applicability of the methodology. We conclude that
EVA is more likely to be embraced by the industry than RO. We therefore
recommend that management first focus on EVA adoption.
