Lighthouse Corporation uses the NPV method for selecting projects,and it does a reasonably good job of estimating projects' sales and costs.However,it never considers real options that might be associated with projects.Which of the following statements is most likely to describe its situation?

A) Its estimated capital budget is probably too small, because projects' NPVs are often larger when real options are taken into account.
B) Its estimated capital budget is probably too large due to its failure to consider abandonment and growth options.
C) Failing to consider abandonment and flexibility options probably makes the optimal capital budget too large, but failing to consider growth and timing options probably makes the optimal capital budget too small, so it is unclear what impact not considering real options has on the overall capital budget.
D) Failing to consider abandonment and flexibility options probably makes the optimal capital budget too small, but failing to consider growth and timing options probably makes the optimal capital budget too large, so it is unclear what impact not considering real options has on the overall capital budget.

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Zybrea Knight · Accepted Answer

Final Answer : A, Explanation :  Real options such as abandonment, flexibility, growth, and timing options often add value to projects because they provide the company with the ability to respond to changes in the market or project conditions. By not considering these real options, Lighthouse Corporation is likely undervaluing projects, leading to a smaller estimated capital budget than if these options were taken into account.

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