The Main Difference Between Applying Real Option Theory to Real

question 9

Multiple Choice

The main difference between applying real option theory to real estate development and applying it to many typical industrial corporate capital budgeting problems is that:

• A) The typical industrial corporation is a publicly traded firm whose stock price rapidly reflects the investment value of the firm.
• B) The typical industrial capital budgeting question faces a "use it or lose it" finite window of opportunity for the investment.
• C) There is usually a reasonably well functioning market in real estate for the development option in the land market), which allows the opportunity cost of the option exercise to be easily quantified in the NPV calculation.
• D) In the typical industrial corporation only the market value of the investment decision can be estimated, not the investment value, which makes it necessary to wait for an NPV substantially greater than zero.

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Definitions:

Marginal Rate Of Transformation

The rate at which one good must be sacrificed to produce an additional unit of another good, based on the given technology and resource constraints.

Marginal Rate Of Transformation

The rate at which one good must be sacrificed to produce an additional unit of another good, reflecting the opportunity cost.

Comparative Advantage

A principle that holds that each party should produce the goods or services for which it has the lowest opportunity cost relative to others.

Trade Restriction

Measures implemented by governments to control the amount of trade across borders, including tariffs, quotas, and non-tariff barriers.