Real options

1. Barngrover Industries regularly takes real options into account when evaluating its proposed projects. Specifically, it considers the option to abandon a project whenever it turns out to be unsuccessful (the abandonment option), and it evaluates whether it is better to invest in a project today or to wait and collect more information (the investment timing option). Assume the proposed projects can be abandoned at any time without penalty. Which of the following statements is CORRECT?

a. Investment timing options always increase the value of a project.

b. A project can either have an abandonment option or an investment timing option, but never both.

c. If there are important first-mover advantages, this tends to increase the value of waiting a year to collect more information before proceeding with a proposed project.

d. The abandonment option tends to increase a project's risk.

e. The abandonment option tends to increase a project's NPV.