Exam 35: Flexibility

The option to increase scope,such as A hotel designed so that the owner can easily diversify beyond lodging services,such as by adding conference facilities,is most similar to:

In the event tree used in the binomial approach to option valuation,at each node the value either increases or decreases by the proportion u or d,respectively.If the annualized volatility of the underlying asset's value is 10 percent per year and the horizon is six months,what are the up-movement u and down-movement d values?

Managing flexibility depends on manager's ability to recognize,structure,and manage opportunities to create value from operating and strategic flexibility.

A project has a 50/50 chance of generating either a positive cash flow of $1 per year forever or a zero cash flow.The discount rate is 5 percent.If the initial cost is $10,what is the NPV with the option to stop after the first year?

A project's contingent net present value (NPV )will always be greater than or equal to its standard NPV.

Which of the following most accurately lists the steps in the four-step process for valuing flexibility in the correct order?

List the three approaches that managers can take when flexibility is neither expected nor required to value assets or projects and the level of uncertainty under which each works best.

Construction of a replicating portfolio can be used to value an option embedded in an investment opportunity.

List the two contingent valuation approaches.Identify which one is more sophisticated and explain when the less sophisticated approach might be preferred.

The value of flexibility is lowest when:

The value of flexibility is greatest when uncertainty is high and managers can react to new information.

Which of the following is most accurate concerning how a change in interest rates can produce an increase in the value of a project with flexibility?

Phased investments,such as a factory that can be built in stages where each stage is contingent on those that precede it and where,at each decision point,management can continue the project by investing additional funds (an exercise price )or abandon it for some estimated value,would best be categorized as:

The option to defer investment,such as the ability of a leaseholder of an undeveloped oil reserve to defer development and investment until oil prices have elevated the value of the reserves above their development costs,is most similar to:

Regardless of the level of uncertainty,it is possible to value assets or a project using a standard discounted cash flow (DCF )approach or a stochastic simulation.However,in cases when managers can decide among different alternatives in response to certain events,contingent valuation approaches are useful.

Flexibility is typically more relevant in the valuation of individual businesses and projects,as it mostly concerns detailed decisions related to production,capacity investment,marketing,and research and development (R&D).

Which of the following is NOT true concerning real-option valuation (ROV)?

How can managers decide which type of contingent valuation works best based on the types of risk they face?

The option to abandon (or sell )a project,such as the right to abandon a coal mine,is most similar to:

Which of the following are true with respect to using real-option valuation (ROV )versus decision tree analysis (DTA)? I.ROV is recommended when the future cash flows are closely linked to traded commodities. II.DTA is recommended when the future cash flows are closely linked to traded currencies. III.DTA is recommended when most of the underlying risk can be diversified away. IV.DTA is recommended when only rough estimates are available for required inputs such as the underlying asset value and variance.