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.

Real options increase or decrease?the value of capital investment projects.

Which type of real option allows the outputs of the production process to be altered if market conditions change during a project's life?

An expansion option

An output flexibility option

An input flexibility option

A growth option

Real option analysis adds value to a project when it is used for which of the following?Check all that apply.

Increasing the riskiness of the capital project and decreasing the project's cash flows

Modifying the way that decision makers perceive flexibility in capital budgeting activities

Identifying real options that can be sold in the financial markets

Making changes to the capital budget before it is started and financed