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 investment firm the right not the obligation to buy, sell, or transform an asset at a set price during a specified period of time.

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

an investment timing option

an expansion option

an output flexibility option

a shutdown option

Real options 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 project's 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

making managerial decision making less deliberate and analytical