1. Which one of the following statements is most CORRECT? A) Real options change

Solution. C) Real options can reduce the cost of capital that should be used to discount a project's expected cash flows.

ID: 2757186 • Letter: 1

Question

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

A) Real options change the size, but not the risk, of projects' expected NPVs.

B) 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.

Solution.

C) Real options can reduce the cost of capital that should be used to discount a project's expected cash flows.

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