Suppose That the Cost of a Real Option Is $1

question 105

Multiple Choice

Suppose that the cost of a real option is $1 million, and that using the real option will improve the expected NPV of a project by $900,000. How should management react to the use of this real option?

• A)Since the real option costs more than it generates in NPV, it should not be considered for implementation.
• B)If the real option provides more flexibility in how management reacts to various project outcomes, it should at least be considered for implementation.
• C)Management should study whether or not the use of this real option will reduce the risk of the project. They will have to weigh the $100,000 potential loss against the reduced risk.
• D)Both b. and c. are correct.

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Definitions:

Written Consent

A formal agreement obtained in written form, indicating a person's voluntary agreement to participate in a procedure or research study after being fully informed about it.

Deceive Participants

The act of intentionally misleading research participants about some aspects of a study.

Suicidality

The risk or proneness towards suicidal behavior, including thoughts, plans, or attempts.

Generalized

Describes a concept or condition that is broad and not specific to one particular instance or case.