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# Principles of Corporate Finance Study Set 3

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## Quiz 22 : Real Options

A project is worth $15 million today without an abandonment option. Suppose the value of the project is either$20 million one year from today (if product demand is high)or $10 million (if product demand is low). It is possible to sell off the project for$13 million if product demand is low. Calculate the value of the abandonment option if the discount rate is 5 percent per year.
Free
Multiple Choice

A

Which of the following conditions might lead a financial manager to decide to expedite a positive net present value investment project?
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Multiple Choice

D

In terms of real options, the cash flows from the project play the same role as
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Multiple Choice

C

The NPV of a new video game, Dexa 1, is −1.5 million after discounting all expected cash flows. However, if high demand in the market evolves, Dexa 2 is a possible follow-on opportunity in two years. In two years it will cost 10 million to start Dexa 2, which will produce 9 million of cash flow in year 2. N(d1)= 0.5785 and N(d2)= 0.1755. The annual interest rate is 11 percent and equals the risk-free rate. What is the Dexa 1 APV?
Multiple Choice
Which of the following scenarios fails to describe a possible real option embedded in a project analysis?
Multiple Choice
An example of a real option is
Multiple Choice
The opportunity to defer investing to a later date may have value because I.the cost of capital may increase in the near future; II.uncertainty may be increased in the future; III.the project has positive, short-term cash flows; IV.market conditions may change and increase the NPV of the project
Multiple Choice
A firm has a three-year real option to invest in a project that has a present value of $500 million with an exercise price (in year 3)of$800 million. Calculate the value of the option given that N(d1)= 0.3 and N(d2)= 0.15. Assume that the risk-free interest rate is 6 percent per year.
Multiple Choice
A firm has a two-year real option to invest in a project that has a present value of $400 million with an exercise price (in year 2)of$600 million. Calculate the value of the option given that N(d1)= 0.6 and N(d2)= 0.4. Assume that the risk-free interest rate is 6 percent per year.
Multiple Choice
The discounted cash-flow (DCF)approach should be
Multiple Choice
A project is worth $12 million today without an abandonment option if the interest rate is 5 percent per year. Suppose the value of the project is either$18 million one year from today (if product demand is high)or $8 million (if product demand is low). It is possible to sell off the project for$10 million if product demand is low. Calculate the value of the abandonment option if the discount rate is 5 percent per year.
Multiple Choice
Assume the following data for Project X: NPV of the project without abandonment: −$2 million; abandonment option value:$4 million. Calculate the adjusted present value (APV)of the project.
Multiple Choice
Which of the following conditions might lead a financial manager to delay a positive-NPV project? (Assume that project NPV-if undertaken immediately-is held constant.)
Multiple Choice
An abandonment option, in effect,
Multiple Choice
Which of the following are examples of real options? I.the option to expand if an investment project succeeds; II.the option to wait (and learn)before investing; III.the option to shrink or abandon a project; IV.the option to vary the mix of output or the firm's production methods
Multiple Choice
Which of the following statements about the option to build flexibility into production facilities is true?
Multiple Choice