Which of the Following Best Describes Real Options

question 9

Multiple Choice

Which of the following best describes real options?

• A)Real options change the size, but not the risk, of projects' expected cash flows.
• B)Real options change the risk, but not the size, of projects' expected cash flows.
• C)Real options are likely to reduce the cost of capital that should be used to discount a project's expected cash flows.
• D)Very few projects actually have real options.

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Definitions:

Growing Annuity

A series of periodic payments that grow at a constant rate per period, often used to calculate the present value of future payments that increase over time.

Present Value

The immediate valuation of a prospective sum of money or sequences of cash payments, utilizing a certain return rate.

Rate of Return

A calculation that determines the percentage gain or loss on an investment relative to the investment's cost.

Years

Units of time measuring the duration of 365 days (or 366 days in a leap year), commonly used to quantify time.