Describe the real option approach to risk-adjusted capital budgeting

What will be an ideal response?

Real options involve the contractional ability to make changes in capital projects, particularly once they are underway. Such options involve the ability to alter outputs (expand, contract, shutdown), alter inputs (both input types and processes using them), and postpone or abandon projects. These options give the holder the right, but not the obligation, to exercise them and usually require the holder to pay an extra amount for this privilege. To determine whether such options are worthwhile, one would calculate the difference in the expected net present values of the capital projects with and without the option and compare it to the cost of paying for the option.

Economics

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A factor that helps to determine the demand for the dollar in the foreign exchange market is

A) the expected future exchange rate. B) the expected future interest rate. C) the amount of U.S. imports. D) the supply of U.S. dollars.

Economics

In the production function Y = AF(K, N), A is ________, K is ________, and N is ________

A) total factor productivity; the capital stock; the number of workers employed B) total factor productivity; investment; the number of workers employed C) the productivity of labor; the capital stock; the size of the labor force D) the productivity of labor; investment; the size of the labor force

Economics