Finance chapter 26 - Real options

which of the following statements regarding capital budgeting is NOT correct a. the conventional NPV method is good enough for capital budgeting because it fully recognizes the value created by a project b. the conventional NPV method is not good enough because it fails to account for the value of real options c. real options would create additional values for an investment project and hence may turn a negative- NPV project into an acceptable one d. failing to consider real options would cause underinvestment

a. the conventional NPV method is good enough for capital budgeting because it fully recognizes the value created by a project

which of the following statements regarding real options is NOT correct ? a .real options exist when managers have the opportunity, after a project has been implemented, to make operating changes in response to changed conditions that modify the projects cash flows b. the option to abandon a project is a real option, but a call option on a stock is not a real option c. real options are most valuable when the underlying source of risk is low d. real options affect the size as well as the risk of a projects expected cash flows

c. real options are most valuable when the underlying source of risk is low

in our example of abandonment option, the option is not exercised if the market demand turns our mediocre, because a. the project is a positive NPV project in that scenario b. the project enhances the shareholder wealth in that scenario c. the project is a negative NPV project, but terminating it would make it an even worse project d. the project is a negative NPV project, but terminating it would cut the loss

c. the project is a negative NPV project, but terminating it would make it an even worse project

in our example of replication option, what are the appropriate discount rates for cash flows? a. the WACC for all cash flows b. the risk free rate for all cash flows c. the risk free rate for the initial investment of the replication project and the WACC for all the others d. the WACC for the initial investment of the replication project and the risk free rate for all the others

c. the risk free rate for the initial investment of the replication project and the WACC for all the others

a manager does NOT want to consider deferring a project if a. more information can be collected to better estimate the cash flows b. the cost of capital is expected to be lower in the future c. the market demand is very low currently but may grow in the future d. investing immediately would create a large first mover advantage in the market

d. investing immediately would create a large first mover advantage in the market

26-4 if a company has an option to abandon a project, would this tend to make the company more or less likely to accept the project today?

having the option to abandon a project makes it more likely that the project will be accepted today

26-3 in general, do timing options make it more or less likely that a project will be accepted today?

timing options make it less likely that a project will be accepted today. Often, if a firm can delay a decision, it may increase the expected NPV of a project