Gleason Research regularly takes real options into account when evaluating its proposed projects.Specifically,it considers the option to abandon a project whenever it turns out to be unsuccessful (the abandonment option),and it evaluates whether it is better to invest in a project today or to wait and 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 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) A project can either have an abandonment option or an investment timing option,but never both.
E) Investment timing options always increase the value of a project.

Question

Quizplus · Accepted Answer

The abandonment option tends to reduce a project's risk because it allows the firm to cut its losses and avoid continuing to invest in a project that is not performing well. This reduces the overall risk of the project for the firm. The other statements are not necessarily true. The abandonment option may or may not reduce a project's NPV, depending on the circumstances. First-mover advantages may or may not increase the value of waiting. And investment timing options can both increase or decrease the value of a project depending on the specific situation.

Gleason Research Regularly Takes Real Options into Account When Evaluating