Which of the following situations has a real option embedded within it? Which of

Question

Which of the following situations has a real option embedded within it?

Which of the following is an example of a sunk cost?

Having a bond that pays coupons throughout its life Having a factory that can be powered by two types of energy Having a call option that has just now expired in-the-money Having a traditional NPV analysis that shows a positive NPV. Having a dividend paying stock where the firm pays the same dividend year after year


NPV analysis is the model of choice for many reasons, but does suffer from which of the following shortcomings? The fact that the decision rule changes for non-standard projects The inability to rank mutually exclusive projects correctly The inability to incorporate the time value of money into decisions The chance that the rule will produce two NPVs for the same project, both satisfying the definition of NPV The inability to incorporate new information once the project is underway

In the 3-door/Let's Make a Deal/Monty Hall problem, once you pick a door, the host opens one of the other two doors. At that moment, in the context of a decision tree, which node are you at? Abandonment node Decision node Information node Root node Terminal node

Which of the following is an example of a sunk cost?

Research and development expenses Expected salvage value Variable costs in the year just ahead Fixed costs in the year just ahead Recovery of working capital

Explanation / Answer

The inability to incorporate new information once the project is underway

Abandonment node

Having a factory that can be powered by two types of energy

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