Which of the Following Statements Regarding Real Options Is True

question 45

Multiple Choice

Which of the following statements regarding real options is true?

• A) The farther away the expiration date, the less valuable the option is.
• B) They can be incorporated into the capital budgeting decision process using decision trees.
• C) They allow decision makers to react to unfavorable, but not favorable, future information/news.
• D) Conventional DCF decision models (e.g., NPV) cannot incorporate the effects of real options.
• E) It is not possible to handle multiple real options embedded in a proposed investment project.

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Definitions:

Bicameralism

A legislative system in which the legislature comprises two separate chambers or houses, often with differing powers and functions, such as the Senate and House of Representatives in the United States.

Congress

The legislative branch of the United States government, made up of the Senate and the House of Representatives, responsible for making federal laws.

Cameralism

An economic theory and administrative practice that emerged in Europe, primarily in German states during the 17th and 18th centuries, focusing on state intervention and management of the economy for the monarchy's welfare.

American Republic

A form of government in the United States characterized by a system of democracy with elected representatives, a president, and a separation of powers.