A real option's value may be more than the amount by which its inclusion in a capital budgeting project increases the project's expected NPV because the real option may:
A)reduce the project's risk.
B)increase the amount the firm makes if the project turns out really well.
C)reduce the loss if the project fails badly.
D)a and c

Question

Quizplus · Accepted Answer

Real options can help reduce the project's risk (similar to diversification), and also provide a safety net in case the project fails badly. Therefore, options A and C are both correct. Additionally, real options can provide opportunities to capture additional value if the project performs better than expected, which is represented by choice B. Overall, both A and C are correct, but B also represents another potential benefit of real options.

A Real Option's Value May Be More Than the Amount