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:

Estimated Uncollectible

An accounting term referring to the portion of accounts receivable that a company does not expect to collect.

Allowance Method

is an accounting technique that estimates and reports the likely amount of uncollectible accounts receivable as an allowance for doubtful accounts.

General Ledger Account

A comprehensive record containing all the financial transactions of a business.