Consider the following statement about real options:

Sometimes real options can give managers the flexibility to decide to invest in a project or wait to make a more calculated decision.

True or False: The preceding statement is correct.

- False

- True

Which type of real option allows the output and/or inputs in the production process to be altered, depending on how market conditions change during a projects life?

- Abandonment option

- Expansion option

- Timing option

- Flexibility option

Consider the following example:

King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplowswhich have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York City. The company will pursue the additional contracts with the cities in New Jersey and Long Island in the future if it thinks that the additional contracts justify investing in more snowplows.

This example describes a real option to .