Though complicated, real options help managers make more informed decisions in selecting projects that add value to a firm.

Which type of real option allows a project to be expanded if demand turns out to be greater than expected?

Investment timing option

Flexibility option

Growth option

Arjen used an oil futures contract in order to price an exploration project that has an abandonment option.

Is it more likely or less likely for Arjen to recommend accepting the project because it has an abandonment option?

Less likely

More likely

This is because if the operating cash flows from the project are _______ than expected, the company can exercise the abandonment option and stop the project.