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

The managers of Chicago Pork Producers Inc. have included an output flexibility option into the design of a proposed capital investment project:

	I. This option allows the outputs of the production process to be altered if market conditions change during a projects life.
	II. This option provides a firm with the flexibility to increase the capacity of an existing product line, to add new products, or to expand into new geographic markets.
	III. This option allows a firm to postpone a project until it can gather more information or market conditions change.
	IV. This option allows a firm to temporarily terminate operations in order to prevent experiencing negative cash flows.

Which of the listed statements best describes an output flexibility option?

Statement I

Statement II

Statement III

Statement IV

None of the statements listed above describes an output flexibility 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

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

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

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