Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 10, Problem 21PS
Summary Introduction
To determine: The real option in the following cases.
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Consider the following statement about real options:
The value of a real option is found by taking the difference between the expected NPV of a project with the option and the expected NPV of the project without the option.
True or False: The preceding statement is correct.
False
True
Which type of real option allows a firm to shut down a project if its cash flows are lower than expected?
Investment timing option
Flexibility option
Abandonment option
Growth option
King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows—which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York…
Consider the following statement about real options:
Sometimes real options can give managers the flexibility to decide to invest in a project or wait to make a more calculated decision.
True or False: The preceding statement is correct.
True
False
Which type of real option allows a project to be expanded if demand turns out to be greater than expected?
Expansion option
Flexibility option
Abandonment option
Timing option
Consider the following example:
King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows—which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York City. The company…
Which of the following is an example of a way in which companies can create value by exploiting real options?
A.Exercising in-the-money real options immediately
B.Optimally delaying or abadoning projects
C.Abandoning good projects in favor of newer projects
D.Acting quickly to take on the new projects even if there is no cost to wait
Chapter 10 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 10 - Capital budgeting process True or false? a. The...Ch. 10 - Prob. 2PSCh. 10 - Prob. 3PSCh. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Prob. 5PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 7PSCh. 10 - Prob. 9PSCh. 10 - Prob. 10PSCh. 10 - Break-even analysis Break-even calculations are...
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