Real Options Flashcards
Which of the following statements regarding real options is false?
A. When real options exist, NPV calculations may underestimate the value of a project.
B. An example of a real option is to expand the project.
C. An example of a real option is to abandon the project.
D. An example of a real option is to change the timing of the project.
A
Which of the following statements regarding real options is false?
A. It is never optimal to defer a positive-NPV project.
B. A firm that has the option to make follow-on investments may decide to undertake negative-NPV projects.
C. An example of a real option is to vary the firm’s production methods.
D. An example of a real option is to shrink the scale of a project.
A
Which of the following statements regarding real options is false?
A. An abandonment option provides partial insurance against failure.
B. Real-option-valuation replaces NPV calculations.
C. An example of a real option is the ability of making follow-up investments.
D. Decision trees can help to identify the possible impact of real options on a project’s cash flows.
C
Which of the following statements regarding real options is false?
A. An expansion option is like a call option on follow-on projects.
B. A timing option is like a call option on the investment project.
C. An option to abandon is like put option on the project’s assets.
D. The option to abandon is only valuable when the project’s assets are intangibles.
D
Which of the following is not an element of a decision tree?
A. Decision node.
B. Payoff.
C. Initial node.
D. Equilibrium node.
D
Which of the following statements regarding real options is false?
A. An expansion option would increase in value if there is a more optimistic forecast (higher expected value).
B. A way to solve a decision tree is to solve from the present to the future.
C. Projects that can be easily expanded or abandoned are more valuable than those that do not provide that flexibility.
D. If the discount rate remains constant, an expansion option would increase in value with increased uncertainty.
B
