9. 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.

QUESTION : Real options (increase or decrease) the value of capital investment projects.

QUESTION: Which type of real option provides a firm with the flexibility to make potentially profitable investments in the future that would not have been possible if the initial project had not been undertaken?

An investment timing option

A growth option

An output flexibility option

An expansion option

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

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

Making changes to the capital budget before it is started and financed

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

Expanding the way that managers view risk and uncertainty, seeing them as phenomena to be appreciated and exploited rather than feared and avoided