Which of the following statements regarding real options is true?
A) The farther away the expiration date, the less valuable the option is.
B) They can be incorporated into the capital budgeting decision process using decision trees.
C) They allow decision makers to react to unfavorable, but not favorable, future information/news.
D) Conventional DCF decision models (e.g., NPV) cannot incorporate the effects of real options.
E) It is not possible to handle multiple real options embedded in a proposed investment project.

Question

Quizplus · Accepted Answer

Real options can be incorporated into the capital budgeting decision process using decision trees, which allow decision makers to consider the various possible outcomes and probabilities associated with an investment project. The value of a real option generally increases as the expiration date becomes further away, making option valuation more complex than conventional DCF models. Real options can also be affected by both favorable and unfavorable future information/news. It is possible to handle multiple real options embedded in a proposed investment project using decision trees or other quantitative methods.

Which of the Following Statements Regarding Real Options Is True