9. Real aptions 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. Troe de False: A real option embedded in a capital project gives the investing firm the right but not the obligation to buy, sell, or transfer an asset ata set price during a specified period of time True O False The managers of Chicago Pork Producers Inc. have induded an inputty option into the design of a proposed pilvestment project L. This option allows a firm to temporary terminate operations in order to prevent experiencing negative cash flows IL. This option allows a firm to postpone a project until it can gather more information or market conditions change It. This option allows a firm to shut down a project Wits cash flows are lower than expected IV. This option allows the inputs in the production process to be altered if market conditions change during a projects Which of the listed statements best describes an input ferdibility option? Which of the listed statements best describes an input flexibility option? Statement IV Statement Statement ! Statement III None of the statements listed above describes an input flexbility option. Real option analysis adds value to a project when it is used for which of the following? Check all that apply. Modifying the way that decision makers perceive fledibility in capital budgeting activities Expanding the way that managers view risk and uncertainty, seeing them as phenomena to be appreciated and exploited rather than feared and avoided Making changes to the capital budget before it is started and financed Making managers aware of the consequences of their decisions and actions on the creation or destruction of value for a capital project Certain real options allow companies to change capacity output in response to changing market conditions. True or False: The preceding statement is correct. O False True Which type of real option allows a project to be expanded if demand turns out to be greater than expected? Growth option Investment timing option O Flexibility option O Abandonment option Consider the following example: Investment timing option O Flexibility option Abandonment option Consider the following example: King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows - which have high up front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York City. The company will pursue the additional contracts with the cities in New Jersey and Long Island in the future if it thinks that the additional contracts justify investing in more snowplows. This example describes a real option to
