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    Other Topics in Capital Budgeting: Multiple Choice: Conceptual

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    Kristel Sumabat
    This document discusses various topics in capital budgeting including real options. It provides multiple choice questions ranging from easy to tough difficulty on abandonment options, investment timing options, flexibility options, and real options. Specifically, it covers how these options impact expected cash flows and risk, issues to consider when delaying investment, examples of flexibility options, and how an abandonment option impacts risk for a company that considers this option in their analysis.

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    Other Topics in Capital Budgeting: Multiple Choice: Conceptual

    Uploaded by

    Kristel Sumabat
    63 views2 pages
    This document discusses various topics in capital budgeting including real options. It provides multiple choice questions ranging from easy to tough difficulty on abandonment options, investment timing options, flexibility options, and real options. Specifically, it covers how these options impact expected cash flows and risk, issues to consider when delaying investment, examples of flexibility options, and how an abandonment option impacts risk for a company that considers this option in their analysis.

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    TB_Chapter12-Other-Topics-in-Capital-Budgeting

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    This document discusses various topics in capital budgeting including real options. It provides multiple choice questions ranging from easy to tough difficulty on abandonment options, investment timing options, flexibility options, and real options. Specifically, it covers how these options impact expected cash flows and risk, issues to consider when delaying investment, examples of flexibility options, and how an abandonment option impacts risk for a company that considers this option in their analysis.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    63 views2 pages

    Other Topics in Capital Budgeting: Multiple Choice: Conceptual

    Uploaded by

    Kristel Sumabat
    This document discusses various topics in capital budgeting including real options. It provides multiple choice questions ranging from easy to tough difficulty on abandonment options, investment timing options, flexibility options, and real options. Specifically, it covers how these options impact expected cash flows and risk, issues to consider when delaying investment, examples of flexibility options, and how an abandonment option impacts risk for a company that considers this option in their analysis.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    CHAPTER 12

    OTHER TOPICS IN CAPITAL BUDGETING


    (Difficulty: E = Easy, M = Medium, and T = Tough)

    Multiple Choice: Conceptual

    Easy:
    Abandonment option Answer: b Diff: E
    1. Which of the following statements best describes the likely impact that an
    abandonment option will have on a project’s expected cash flow and risk?

    a. No impact on expected cash flow, but risk will increase.


    b. Expected cash flow increases and risk decreases.
    c. Expected cash flow increases and risk increases.
    d. Expected cash flow decreases and risk decreases.
    e. Expected cash flow decreases and risk increases.

    Investment timing option Answer: e Diff: E


    2. Commodore Corporation is deciding whether it makes sense to invest in a
    project today, or to postpone this decision for one year. Which of the
    following statements best describes the issues that Commodore faces when
    considering this investment timing option?

    a. The investment timing option does not affect the expected cash flows
    and should therefore have no impact on the project’s risk.
    b. The more uncertainty about the project’s future cash flows the more
    likely it is that Commodore will go ahead with the project today.
    c. If the project has a positive expected NPV today, this means that its
    expected NPV will be even higher if it chooses to wait a year.
    d. All of the above statements are correct.
    e. None of the above statements is correct.

    Flexibility option Answer: c Diff: E N


    3. Which of the following is an example of a flexibility option?

    a. A company has the option to invest in a project today or to wait a


    year.
    b. A company has the option to back out of a project that turns out to be
    unproductive.
    c. A company pays a higher cost today in order to be able to reconfigure
    the project’s inputs or outputs at a later date.
    d. A company invests in a project today that may lead to enhanced
    technological improvements that allow it to expand into different
    markets at a later date.
    e. All of the statements above are correct.

    Chapter 12 - Page 1
    Real options Answer: c Diff: E
    4. Which of the following is an example of a flexibility option?

    a. A company has the option to invest in a project today or to wait a


    year.
    b. A company has the option to back out of a project that turns out to be
    unproductive.
    c. A company pays a higher cost today in order to be able to reconfigure
    the project’s input or outputs at a later date.
    d. A company invests in a project today that may lead to enhanced
    technological improvements that allow it to expand into different
    markets at a later date.
    e. All of the statements above are correct.

    Real options Answer: b Diff: E N


    5. Whalen Maritime Research Inc. regularly takes real options into account
    when evaluating its proposed projects. Specifically, Whalen considers
    the option to abandon a project whenever it turns out to be unsuccessful
    (the abandonment option). In addition, it usually evaluates whether it
    makes sense to invest in a project today or whether to wait to collect
    more information (the investment timing option). Assume the proposed
    projects can be abandoned at any time without penalty. Which of the
    following statements is most correct?

    a. The abandonment option tends to reduce a project’s NPV.


    b. The abandonment option tends to reduce a project’s risk.
    c. If there are important first-mover advantages, this tends to increase
    the value of waiting a year to collect more information before
    proceeding with a proposed project.
    d. Statements a and b are correct.
    e. All of the statements above are correct.

    Chapter 12 - Page 2

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