Which of the Following Will NOT Increase the Value of a Real

question 12

Multiple Choice

Which of the following will NOT increase the value of a real option?

• A) an increase in the volatility of the underlying source of risk.
• B) an increase in the risk-free rate.
• C) an increase in the cost of obtaining the real option.
• D) a decrease in the probability that a competitor will enter the market of the project in question.
• E) lengthening the time in which a real option must be exercised.

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Definitions:

Expected Rate of Return

The anticipated earnings on an investment, typically expressed as an annual percentage.

Marginal Utility

The change in satisfaction or utility an individual gains from consuming an additional unit of a good or service.

MU/P Ratio

The MU/P Ratio stands for the marginal utility to price ratio, used in economics to analyze consumer choice by comparing the additional satisfaction (utility) received from an increase in consumption of a good relative to its price.

Marginal Utility

The alteration in pleasure or usefulness a person receives from using an extra unit of a product or service.