Question

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. O True False The managers of Aberdeen Petroleum Refiners Corp. have included an expansion option into the design of a proposed capital investment project: 1. This option allows the outputs of the production process to be altered if market conditions change during a project's life. II. This option allows a project to be expanded If demand turns out to be greater than expected. III. This option allows the inputs in the production process to be altered if market conditions change during a project's life. 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 expansion option? Statement IT Statement 1 Statement III Statement IV None of the statements listed above describes an expansion option

Answer 1

False - this is only one example of a real option. Real options can be of many types including abandonment options, expansion options etc.

II - This option allows project to be expanded if demand is higher than expected.

Real options adds value to a project when :

This is answered correctly. It adds value by expanding the way risk is viewed, modifying the way flexibility is perceived, and making managers aware of their consequences.