Exam 16: Real Options

Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately.Assuming that the probability of high or low demand is still 50%,the NPV of the Kinston Industries Mountain Bike Project is closest to:

When there is an option to delay,a good rule of thumb is to invest only when ________.

Value can be created by ________ to resolve.

The equivalent annual benefit of project A is closest to:

Assuming that Kinston has the ability to sell the prototype in year one for $300,000,draw a decision tree detailing the Kinston Industries Mountain Bike Project.

Given the embedded option to sell the plant,the value of your plant will be closest to:

Assume that you are not able to sell the plant,but you are able to shut down the plant at no cost at any time.The value of the option to abandon production will be closest to:

Use the information for the question(s) below. You own a small manufacturing plant that currently generates revenues of $2 million per year. Next year, based upon a decision on a long-term government contract, your revenues will either increase by 20% or decrease by 25%, with equal probability, and stay at that level as long as you operate the plant. Other costs run $1.6 million dollars per year. You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital is 10%. -If you are awarded the government contract and your sales increase by 20%,then the value of your plant will be closest to:

When a firm has a real option to invest in the future,it is known as a ________.Because these options have value,they contribute to the value of any firm that has ________ investment opportunities.

Using the equivalent annual benefit method,which project would you select and why?

Which of the following statements is false?

When you do not have the option to wait,it is optimal to invest in ________ project.When you have the option of deciding when to invest,it is usually optimal to invest only when ________.

In Canada,mortgage lenders are ________ against default by government agencies such as ________.

Describe the two factors that affect the value of an investment timing option?

Which of the following statements is false?

If there is ________ to waiting,investing ________ never makes sense.

The hurdle rate rule uses ________ than ________ to compute the NPV,but then applies the regular NPV rule.