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 firm to shut down a project if its cash flows are lower than expected?

Growth option

Abandonment option

Flexibility 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?

More likely

Less 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.