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

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?

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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 ...

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.