The discounted cash flow (DCF) method is extensively used in international arbitration as an income-based valuation approach. However, due to the various potential outcomes that can result from the DCF and, therefore, the increased uncertainty as to the award, tribunals have sometimes discarded it in favour of historical cost-driven measures of value.

In their paper titled “Understanding Modern Valuation Methods and the Value of Managerial Flexibility,” Managing Director Dr. Fabrizio Hernández, Associate Director Ralph Meghames, and Senior Consultant Dr. Adjmal Sirak explore the key applications in which the real option model or “modern DCF” method can improve analysis, increase the accuracy of risk assessment, and complement the “traditional DCF” method.

The authors also explore the relationship between the “traditional DCF” and “modern DCF” approaches and how discount factor, managerial flexibility, and the different implementation tools of real options models (such as tree and simulation models) are means to increase confidence in traditional DCF methods.