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. True or False: A real option embedded in a capital project gives the investing firm the right and the obligation to buy, sell, or transform an asset at a set price during a specified period of time. O False True The managers of Virginia Hydroponics Co. have included an input flexibility option into the design of a proposed capital investment project: I. This option allows a firm to temporarily terminate operations in order to prevent experiencing negative cash flows II. This option allows a firm to postpone a project until it can gather more information or market conditions change. III. This option allows a firm to shut down a project if its 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 project's life. Which of the listed statements best describes an input flexibility option? O Statement IV Statement I O Statement II O Statement III 0 None of the statements listed above describes an input flexibility option capital investment project: I. This option allows a firm to temporarily terminate operations in order to prevent experiencing negative cash flows II. This option allows a firm to postpone a project until it can gather more information or market conditions change. III. This option allows a firm to shut down a project if its 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 project's life. Which of the listed statements best describes an input flexibility option? O Statement IV O Statement I Statement II O Statement III O None of the statements listed above describes an input flexibility option. Real option analysis adds value to a project when it is used for which of the following? Check all that apply. Identifying real options that can be sold in the financial markets Increasing the riskiness of the capital project and decreasing the project's cash flows Making changes to the capital budget before it is started and financed O Making managerial decision making less deliberate and analytical 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. True or False: A real option embedded in a capital project gives the investing firm the right and the obligation to buy, sell, or transform an asset at a set price during a specified period of time. O False True The managers of Virginia Hydroponics Co. have included an input flexibility option into the design of a proposed capital investment project: I. This option allows a firm to temporarily terminate operations in order to prevent experiencing negative cash flows II. This option allows a firm to postpone a project until it can gather more information or market conditions change. III. This option allows a firm to shut down a project if its 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 project's life. Which of the listed statements best describes an input flexibility option? O Statement IV Statement I O Statement II O Statement III 0 None of the statements listed above describes an input flexibility option capital investment project: I. This option allows a firm to temporarily terminate operations in order to prevent experiencing negative cash flows II. This option allows a firm to postpone a project until it can gather more information or market conditions change. III. This option allows a firm to shut down a project if its 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 project's life. Which of the listed statements best describes an input flexibility option? O Statement IV O Statement I Statement II O Statement III O None of the statements listed above describes an input flexibility option. Real option analysis adds value to a project when it is used for which of the following? Check all that apply. Identifying real options that can be sold in the financial markets Increasing the riskiness of the capital project and decreasing the project's cash flows Making changes to the capital budget before it is started and financed O Making managerial decision making less deliberate and analytical
