Briefly Explain What Is Meant by a Real Option in Capital

question 26

Essay

Briefly explain what is meant by a real option in capital budgeting. Give 2 concrete examples.

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Definitions:

Depreciation

The distribution of a physical asset's cost across its lifespan, mirroring its depreciation over time.

Operating Costs

Expenses associated with the day-to-day activities of a business, including costs of goods sold and administrative expenses.

Profitability Index

An investment appraisal technique that calculates the relationship between the costs and benefits of a project by dividing the present value of future cash flows by the initial investment cost.

Difficult to Quantify

This term describes items or factors that are hard to measure or express in numerical terms due to their subjective or complex nature.