For companies in capital-intensive industries, investments are more often than not of the supersized variety. The utility that builds new plants that employ a variety of power-generating technologies, for example, handles an investment volume of a daunting size and complexity. Then there is the uncertainty: once a company embarks on an investment, decades can pass before it actually creates value. In the basic-materials and energy industries, for instance, the average new project costs about $500 million and takes 20 to 30 years to create value on a net present value (NPV) basis.

Taken together, the uncertainty and the complexity make it particularly difficult for companies to sort through myriad combinations of prospective investments and select the most promising ones. If a power company, for example, considered only limited variations of the most obvious factors—the size, location, technology, and timing of possible investments, as well as a variety of future market scenarios—it would still end up with more possible portfolio combinations than it could evaluate easily (Exhibit 1).

As a result, executives typically opt for an overly simplistic approach: They evaluate investment opportunities intuitively, considering the two...