Best Describes An Investment Timing Option

Best describes an investment timing option

21. Which one of the following is an example of a "flexibility" option?

a.

Best describes an investment timing option

A company has an option to invest in a project today or to wait for a

year before making the commitment.

b.

A company has an option to close down an operation if it turns out to

be unprofitable.

c.

Net Present Value is the most realistic technique for evaluation

A company agrees to pay more to build a plant in order to be able to

change the plant's inputs and/or outputs at a later date if

conditions change.

d. A company invests in a project today to gain knowledge that may

enable it to expand into different markets at a later date.

e. A company invests in a jet aircraft so that its CEO, who must travel

frequently, can arrive for distant meetings feeling less tired than

if he had to fly a commercial airline.

22.

Best describes an investment timing option

Which one of the following statements best describes the most likely

impact that a profitable abandonment option would have on a project's

expected cash flow and risk?

a. No impact on the PV of expected cash flows, but risk will increase.

b.

Background

The PV of expected cash flows increases and risk decreases.

c. The PV of expected cash flows increases and risk increases.

d. The PV of expected cash flows decreases and risk decreases.

e. The PV of expected cash flows decreases and risk increases.

 23.

Use coal or invest in renewables: a real options analysis of energy investments in the Philippines

Which one of the following is NOT a real option?

a. The option to expand production if the product is successful.

b. The option to buy shares of stock if its price is expected to

increase.

c. The option to expand into a new geographic region.

d. The option to abandon a project if cash flows turn out to be lower

than expected.

e.

The option to switch the type of fuel used in an industrial furnace

to lower the cost of production.

24.

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Which one of the following will NOT increase the value of a real option?

a. Lengthening the time during which a real option must be exercised.

b. An increase in the volatility of the underlying source of risk.

c. An increase in the risk-free rate.

d. An increase in the cost of obtaining the real option.

e.

A decrease in the probability that a competitor will enter the market

of the project in question.

25. Which one of the following statements is most CORRECT?

a. Real options change the size, but not the risk, of projects' expected

NPVs.

b.

Best describes an investment timing option

Real options change the risk, but not the size, of projects' expected

NPVs.

c. Real options can reduce the cost of capital that should be used to

discount a project's expected cash flows.

d. Very few projects actually have real options. They are theoretically

interesting but of little practical importance.

e. Real options are more valuable when there is very little uncertainty

about the true values of future sales and costs.

26.

Best describes an investment timing option

Sheehan Inc. is deciding whether to invest in a project today or to

postpone the decision until next year. The project has a positive

expected NPV, but its cash flows might turn out to be lower than

expected, in which case the NPV could be negative. No competitors are

likely to invest in a similar project if the firm decides to wait.

Which of the following statements best describes the issues that the

firm faces when considering this investment timing option?

a.

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The investment timing option would not affect the cash flows and

therefore would have no impact on the project's risk.

b. The more uncertainty about the future cash flows, the more logical it

is to go ahead with this project today.

c.

Best describes an investment timing option

Since the project has a positive expected NPV today, this means that

its expected NPV will be even higher if the firm chooses to wait a

year.

d.

Since the project has a positive expected NPV today, this means that

it should be accepted in order to lock in that NPV.

e.

How are pre market prices determined on an ipo

Waiting would probably reduce the project's risk.

27. Gleason Research regularly takes real options into account when

evaluating its proposed projects.

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Specifically, it considers the option

to abandon a project whenever it turns out to be unsuccessful (the

abandonment option), and it evaluates whether it is better to invest in

a project today or to wait and collect more information (the investment

timing option). Assume the proposed projects can be abandoned at any

time without penalty. Which of the following statements is CORRECT?

a. The abandonment option tends to reduce a project's NPV.

b.

The abandonment option tends to reduce a project's risk.

c. If there are important first-mover advantages, this tends to increase

the value of waiting a year to collect more information before

proceeding with a proposed project.

d.

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A project can either have an abandonment option or an investment

timing option, but never both.

e. Investment timing options always increase the value of a project.

(Comp.) Real options C I Answer: a MEDIUM

28. Which of the following statements is CORRECT?

a.

In general, the more uncertainty there is about market conditions,

the more attractive it may be to wait before making an investment.

b. In general, the greater the strategic advantages of being the first

competitor to enter a given market, the more attractive it probably

is to wait before making an investment.

c.

In general, the higher the discount rate, the more attractive it

probably is to wait before making an investment.

d. In general, investment timing options are more valuable than

abandonment options.

e. In general, abandonment options are rarely seen in the real world.

29.

Options: A Foolish Introduction

Weisbach Electronics is considering investing in India. Which of the

following factors would make the company less likely to proceed with the

investment?

a. The company would have the option to withdraw from the investment

after 2 years if it turns out to be unprofitable.

b. The investment would increase the odds of the company being able to

subsequently make a successful entry into China.

c. The investment would preclude the company from being able to make a

profitable investment in China.

d.

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Competitors are considering similar investments in India, and the

firm can discourage them from trying by entering now.

e. The new plant could be easily retrofitted to manufacture many of the

firm's other products.

30. Wahal Corporation uses the NPV method when selecting projects, and it

does a reasonably good job of estimating projects' sales and costs.

However, it never considers any real options that might be associated

with projects.

Which of the following statements is most likely to

describe its situation?

a. Its estimated capital budget is probably too small, because projects'

NPVs are often larger when real options are taken into account.

b. Its estimated capital budget is probably too large due to its failure

to consider abandonment and growth options.

c.

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Failing to consider abandonment and flexibility options probably

makes the optimal capital budget too large, but failing to consider

growth and timing options probably makes the optimal capital budget

too small, so it is unclear what impact the failure to consider real

options has on the overall capital budget.

d.

Failing to consider abandonment and flexibility options probably

makes the optimal capital budget too small, but failing to consider

growth and timing options probably makes the optimal capital budget

too large, so it is unclear what impact not considering real options

has on the overall capital budget.

e.

Real options should not have any effect on the size of the optimal

capital budget.

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