Which of the following statements regarding real options is not true?
A) Similar to financial options, real options are traded on an open exchange.
B) Their consideration in capital budgeting analysis is designed to complement conventional DCF models.
C) They refer to options on real assets (i.e., tangible and intangible property).
D) They can never reduce the NPV of a proposed investment; they can only increase its NPV.
E) They represent one way of handling risk and uncertainty in the capital budgeting process.

Question

Quizplus · Accepted Answer

Real options are not traded on an open exchange like financial options. Real options refer to the potential opportunities or flexibility to make future decisions that can impact the value of an investment, and their consideration in capital budgeting analysis is designed to complement conventional DCF models. Real options can either increase or decrease the NPV of a proposed investment, depending on the nature of the option and the uncertainty involved in the investment decision. Therefore, option analysis is one way of handling risk and uncertainty in the capital budgeting process.

Which of the Following Statements Regarding Real Options Is Not