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 but not 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 the inputs in the production process to be altered if market conditions change during a projects life?

An investment timing option

An input flexibility option

An abandonment 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.

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

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

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