Consider the following statement about real options:

The value of a real option is found by taking the difference between the expected NPV of a project with the option and the expected NPV of the project without the option.

True or False: The preceding statement is correct.

False

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?

Investment timing option

Flexibility option

Growth option

Abandonment option

Consider the following example:

Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, $100 million is a huge investment for Clemens; if things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment of $20 million to see if the market is as strong as they hope it is. If demand is strong and the opportunity is still available, Clemens will increase its investment at a later date.

This example describes a real option to .