It is often easy to overlook the impact of inflation on the net present value of the project. Not incorporating the impact of inflation in determining the value of the cash flows of the project can result in erroneous estimations. Consider the following scenario: Praxis Corp. is considering opening a new division to make iGadgets that it expects to sell at a price of $14,800 each in the first year of the project. The company expects the cost of producing each iGadget to be $7,100 in the first year; however, it expects the selling price and cost per iGadget to increase by 1% each year. Based on this information, select the correct answer: Selling price in year 4: Cost per unit in year 4: If a company does not take inflation into account when analyzing a project, the expected net present value (NPV) of the project will typically be than the true NPV of the project. 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. False True Which type of real option allows a firm to postpone a project until it can gather more information? Growth option O Abandonment option Flexibility option Investment timing option Which type of real option allows a firm to postpone a project until it can gather more information? Growth option Abandonment option Flexibility option Investment timing 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 firm's inventory of SUVs to be too hiah Smoltz wants to stop production for its SUVs and focus on its sedans. expand abandon This example describes a real option to It is often easy to overlook the impact of inflation on the net present value of the project. Not incorporating the impact of inflation in determining the value of the cash flows of the project can result in erroneous estimations. Consider the following scenario: Praxis Corp. is considering opening a new division to make iGadgets that it expects to sell at a price of $14,800 each in the first year of the project. The company expects the cost of producing each iGadget to be $7,100 in the first year; however, it expects the selling price and cost per iGadget to increase by 1% each year. Based on this information, select the correct answer: Selling price in year 4: Cost per unit in year 4: If a company does not take inflation into account when analyzing a project, the expected net present value (NPV) of the project will typically be than the true NPV of the project. 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. False True Which type of real option allows a firm to postpone a project until it can gather more information? Growth option O Abandonment option Flexibility option Investment timing option Which type of real option allows a firm to postpone a project until it can gather more information? Growth option Abandonment option Flexibility option Investment timing 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 firm's inventory of SUVs to be too hiah Smoltz wants to stop production for its SUVs and focus on its sedans. expand abandon This example describes a real option to
