7. Introduction to real options Aa Aa Consider the follawing statement about rea

Question

7. Introduction to real options Aa Aa Consider the follawing statement about real aptions: Sometimes real options can give managers the lexibility to decide to invest in a project or wait to make a more calculated decision. True or False: The preceding statement is correct. False O True Which type of real aption allows a project to be expanded if demand turns out to be greater than expected? O Flexibility option O Expansian aption Timing option O Abandonment option Consider the follawing example: Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, $100 million is a huge investment for Clemens; if things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment of $20 mil ion to see if the market is as strong as they hope it is. If demand is strong and the opportunity is still available, Clemens will increase its investment at a later dabe. This example describes a real option to

Explanation / Answer

1) True:

Valuing option such as abandonment option will help manager to decide whether he should go forward with it or not

2) Expansion option

3) This example discribe real option to Expansion option

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