Question

5. Introduction to real options Consider the following statement about real options: Sometimes real options can give managers the flexibility to decide to invest in a project or wait to make a more calculated decision. True or False: The preceding statement is correct. True False Which type of real option allows the output and/or inputs in the production process to be altered, depending on how market conditions change during a project’s life? Abandonment option Timing option Flexibility option Expansion option Consider the following example: Smoltz Motors has plants around the country that specialize in specific models of cars. Smoltz has determined that lower demand has led the firm’s inventory of SUVs to be too high. Smoltz wants to stop production for its SUVs and focus on its sedans. This example describes a real option to .

Answer 1

Answer and Explanation:

The given statement is true as the real options would provide the managers the flexibility for deciding to invest or wait so that it would make a more computed decision

The real option that permits the input or output in the production process that could vary so it would be investment timing option as here the timing plays a very vital role

The given situation represent a real option to expand as the firm would pursue the extra expansion contracts