10. Introduction to real options

Consider the following statement about real options:

Certain real options allow companies to change capacity output in response to changing market conditions.

True or False: The preceding statement is correct.

A. False B. True

Which type of real option allows the output and/or inputs in the production process to be altered, depending on how market conditions change during a projects life?

A. Flexibility option B. Growth option C. Investment timing option D. Abandonment option

Consider the following example:

Smoltz Motors has plants around the country that specialize in specific models of cars. Smoltz has determined that lower demand has led the firms inventory of SUVs to be too high. Smoltz wants to stop production for its SUVs and focus on its sedans.

This example describes a real option to __________ .

A. Abandon B. Expand