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.

True or False: A real option embedded in a capital project gives the investing firm the right and 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 a firm to temporarily terminate operations in order to prevent experiencing negative cash flows?

A shutdown option

An output flexibility option

An input flexibility option

A growth option

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

Identifying real options that can be sold in the financial markets

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

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