10. More on real options

Consider the following statement about real options:

Decision tree analysis is more commonly used in valuing securities than real assets.

True or False: The preceding statement is correct.

True

False

Which type of real option allows a firm to shut down a project if its cash flows are lower than expected?

Flexibility option

Growth option

Investment timing option

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 .