PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 10, Problem 23PS
Real options True or false?
- a. Decision trees can help identify and describe real options.
- b. The option to expand increases PV.
- c. High abandonment value decreases PV.
- d. If a project has positive
NPV , the firm should always invest immediately.
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Which of the following statements is CORRECT?
a.
An NPV profile graph shows how a project's payback varies as the cost of capital changes.
b.
The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases.
c.
An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life.
d.
An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital.
e.
We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.
Provide explanation for the choice
The decision tree below describes a “sure thing” investment and a “risky” investment. Use backward induction to evaluate which is the better investment. Assume all values are already given in present value terms.
Consider the following statement: “In contexts of increased uncertainty, the usefulness of real options when valuing an investment opportunity increases”. Do you agree with this statement? Explain your answer.
Chapter 10 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 10 - Terminology Match each of the following terms to...Ch. 10 - Project analysis True or false? a. Sensitivity...Ch. 10 - Sensitivity analysis Otobais staff (see Section...Ch. 10 - Prob. 4PSCh. 10 - Prob. 7PSCh. 10 - Scenario analysis What is the NPV of the electric...Ch. 10 - Prob. 9PSCh. 10 - Break-even analysis Break-even calculations are...Ch. 10 - Prob. 11PSCh. 10 - Prob. 12PS
Ch. 10 - Prob. 13PSCh. 10 - Break-even analysis A financial analyst has...Ch. 10 - Fixed and variable costs In a slow year, Deutsche...Ch. 10 - Operating leverage You estimate that your cattle...Ch. 10 - Prob. 17PSCh. 10 - Prob. 20PSCh. 10 - Real options Explain why options to expand or...Ch. 10 - Prob. 22PSCh. 10 - Real options True or false? a. Decision trees can...Ch. 10 - Prob. 24PSCh. 10 - Real options An auto plant that costs 100 million...Ch. 10 - Decision trees Look back at the Vegetron electric...Ch. 10 - Prob. 27PSCh. 10 - Prob. 28PSCh. 10 - Prob. 29PSCh. 10 - Prob. 32PS
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- When Building a Portfolio Optimization Model, Exceeding the constraints would result in what??????????arrow_forwardAnother name for the expected value of an investment would be: Answer a. The mean value b. The upper-end value c. The certain value d. The risk-free valuearrow_forward4. 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. False True 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? A. Expansion option B. Flexibility option C. Abandonment option D. Timing option Consider the following example: Clemens Inc. is considering a $100 million investment in a new line of soft drinks. However, $100 million is a huge investment for Clemens; if things turn bad, it could wipe out the company. A few senior managers have suggested a smaller investment of $20 million to see if the market is as strong as they hope it is. If demand is strong and the opportunity is still…arrow_forward
- True / False and explain (if the statement is false, explain why it is incorrect) 1. Simulation analysts uses best- and worst case scenarios to determine the most likely outcome 2. In the absence of capital rationing, the firm should take all projects with a positive net present value.arrow_forwardExplain in general terms what each of the following real options is and how it could changeprojects’ NPVs and their corresponding risk relative to what would have been estimated ifthe options had not been considered.a. Abandonmentb. Timingc. Growthd. Flexibilityarrow_forwardThe best investment ____________________. Select one or more: a. maximizes reward b. maximizes Sharpe c. minimizes risk d. eliminates riskarrow_forward
- Which statements are INCORRECT? Check all that apply: when IRR is positive, the project is acceptable when profitability index is positive, the project is acceptable a decrease in a firm's WACC will increase the attractiveness of the firm's investment options when required return is less than internal rate of return, the project is acceptablearrow_forwardExplain why the following statement is true: In general, the more uncertainty thereis about future market conditions, the more attractive an investment timing optionwill be, other things held constant.arrow_forwardIf you have a project combined with above-average market risk, which one of the following decisions should you make? Accept if the IRR is greater than the WACC. Use a higher discount rate than the WACC to reflect the project's risk and accept if NPV is positive at this higher discount rate. Accept if the cash flows discounted at the WACC have a positive NPV. Discount the cash flows at the IRR and accept if NPV is positive.arrow_forward
- Which of the following statements is CORRECT? a. The NPV profile graph for a normal project will generally have a positive (upward) slope as the life of the project increases. b. An NPV profile graph shows how a project's payback varies as the cost of capital changes. O c. An NPV profile graph is designed to give decision makers an idea about how a project's contribution to the firm's value varies with the cost of capital. d. An NPV profile graph is designed to give decision makers an idea about how a project's risk varies with its life. e. We cannot draw a project's NPV profile unless we know the appropriate WACC for use in evaluating the project's NPV.arrow_forwardYou are considering the following projects but have limited funds to invest and can't take them all. Using the profitability index, rank the projects in the order in which you would accept them. That is, rank them from best to worst. Project Initial Investment NPVarrow_forwardIn a few sentences, answer the following question as completely as you can. According to your textbook, “an investment should be accepted if the net present value is positive and rejected if it is negative” (p. 239). What does an NPV of zero mean?If you were a financial decision maker facing a project with NPV of zero (or close to zero) what would you do? Can you think of any other factors that might influence your decision?arrow_forward
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