Purchase Solution

Which are real options? End-Of-Project recovery of capital

Not what you're looking for?

Ask Custom Question

1) Which of the following are NOT real options?

A) The option to expand production if the product is successful.

B) The option to expand into a new geographic region.

C) The option to buy additional shares of stock if the stock price goes up.

D) The option to switch sources of fuel used in an industrial furnace.

E) The option to abandon a project.

2) The end-of-project recovery of any working capital required to operate the project should NOT be included in the cash flows used to estimate a project's NPV? True or False?

Purchase this Solution
Solution Summary

This solution answers two questions: First, it defines and gives examples of "real options." It then discusses the way to factor the increase and/or recovery of working capital in net present value computations.

Solution Preview

1. The definition of a real option is an option which exists only in capital budgeting decisions. Unlike financial options, real options do not have involve an underlying asset which can be traded. In fact, the options themselves usually cannot be traded. The only item listed which does not meet ...

Purchase this Solution
Free BrainMass Quizzes
Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

Motivation

This tests some key elements of major motivation theories.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

View More Free Quizzes
Related BrainMass Solutions

  • Valuation Capital Budgeting

    Using the IRR function in excel, the IRR of Project L is 11.74% Real options relate to being able to abandon or delay the project.

  • Savage Value Considerations

    Terminal cash flow= Recovery of Working capital + After tax Salvage value of Project =300000+100000 $400,000.00=Answer Calculations are shown below: Note: Recovery of Working capital= $300000 After tax Salvage value of

  • Capital budgeting

    286578 Capital budgeting for new product: Compute standard and real options NPV Your company wants to invest in a new product.

  • Network Disaster recovery plan

    All project information, documents, and drawings, all of which are stored on the network, must be available at all times for reference and information retrieval purposes for the run of the project.

  • Real options / WACC / Manufacturing plants abroad

    In order to decide if it was worth the cost to obtain the real option, the firm should calculate the change in the value of the project with real options and without options and compare that with the cost of real options.

  • Real Options and Capital Budgeting

    Real Options B) In general, do timing options make it more or less likely that a project will be accepted today?

  • Multiple choice

    Real options are less valuable when the underlying source of risk is high. Question 9 Clueless Corporation never considers abandonment options or growth options when estimating its optimal capital budget.

  • Use of Real Options Theory in Financial Management

    When the net present value of a project is positive, they are likely not to account for the "real options" in their project evaluations (Schwartz & Trigeorgis, 2005).

  • Capital Budgeting and Depreciation Methods

    520680 Capital Budgeting and Depreciation Methods Please help with these questions. What are the important differences in the way operating risk (versus financial risk) enters into the consideration of a capital budgeting project?"

View More Related Solutions