16. Real Options. What is the option in each of the following cases. Is it a call or a put? (LO3)

a. Western Telecom commits to production of digital switching equipment specifically designed for the European market. As a stand-alone venture, the project has a negative NPV, but it is justified by the need for a strong market position in the rapidly growing, and poten- tially very profitable, market.

b. Western Telecom vetoes a fully integrated automated production line for the new digital switches. It will rely on standard, less expensive equipment even though the automated pro- duction line would be more efficient overall using the specialized equipment, according to a discounted cash-flow calculation.