REAL OPTIONS AND OTHER TOPICS IN CAPITAL BUDGETING
Keeping Your Options Open
Briefly describe what investment timing options are and why they
are valuable.
Explain why the following statement is true: “In general, the more
uncertainty there is about future market conditions, the more attractive it is to delay the decision.”
If a firm fails to consider growth options, would this cause it to
underestimate or overestimate projects’ NPVs? Explain.
What are “input flexibility options” and “output flexibility options?”
How do flexibility options affect projects’ NPVs and risk?
Briefly describe the replacement chain (common life) and the EAA
approaches to the unequal life problem.
Is it always necessary to adjust all projects’ cash flows if different
projects have unequal lives? Explain.
Explain how a financial manager might estimate his or her firm’s
optimal capital budget.
What is capital rationing?
What factors must be considered when a firm is developing its optimal capital budget?
How does a firm’s annual capital budget reflect market conditions?