Asked by Clarise Gindap on Jul 13, 2024
Verified
Real options are generally worth more than their expected NPV impact due to the effect real options have on risk.
Real Options
An approach in finance where choices are treated as derivative securities that managers can use to maximise returns while deferring investment decisions.
Expected NPV
An estimation of the Net Present Value of a project or investment, considering the potential outcomes and their probabilities.
- Understand the concept and value of real options in capital budgeting.
- Realize the impact of flexibility and abandonment options on project valuation.
Verified Answer
LP
Latreva PurdyJul 17, 2024
Final Answer :
True
Explanation :
Real options allow for flexibility and strategic decision-making in uncertain situations, reducing the overall risk of a project or investment. This added value from risk reduction is not captured in the expected NPV calculation, making real options worth more than their expected impact on cash flows.
Learning Objectives
- Understand the concept and value of real options in capital budgeting.
- Realize the impact of flexibility and abandonment options on project valuation.
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