Which of the Following Statements Regarding Real Options Is NOT

question 32

Multiple Choice

Which of the following statements regarding real options is NOT correct?

• A)Real options build greater flexibility into a project and thus increase its net present value (NPV).
• B)Real options should only be exercised when they increase the NPV of a project.
• C)Real options give owners the right, but not the obligation, to exercise these opportunities at a later date.
• D)Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date.

---

Definitions:

Fixed Manufacturing Overhead

Costs incurred during the production process that do not vary with the level of production, such as rent for factory buildings, salaries of plant managers, and depreciation of manufacturing equipment.

Budget Variance

The variance between what was expected to be spent or earned, according to the budget, and the real amount that was spent or received.

Predetermined Overhead Rate

A rate used to allocate manufacturing overhead to individual products or job orders, based on a specific activity base, such as labor hours or machine hours.

Fixed Component

The portion of total costs that remains unchanged regardless of the level of production or business activity.