6. Real options

Projects are also often embedded with different options that can help making decisions under uncertainty. There are techniques used to evaluate these embedded options which are called real options. The models used to value these options are based on the type of the real option available for the project.

True or False: A real option embedded in a capital project gives the investing firm the right but not the obligation to buy, sell, or transfer an asset at a set price during a specified period of time.

True

False

Which type of real option allows the outputs of the production process to be altered if market conditions change during a projects life?

A shutdown option

An expansion option

An output flexibility option

An input flexibility option

Real option analysis adds value to a project when it is used for which of the following? Check all that apply.

Making managers aware of the consequences of their decisions and actions on the creation or destruction of value for a capital project

Increasing the riskiness of the capital project and decreasing the projects cash flows

Identifying real options that can be sold in the financial markets

Modifying the way that decision makers perceive flexibility in capital budgeting activities