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Homework answers / question archive / 1) Which of the following statements is FALSE? A) If there is a lot of uncertainty, the benefit of waiting is diminished

1) Which of the following statements is FALSE? A) If there is a lot of uncertainty, the benefit of waiting is diminished

Accounting

1) Which of the following statements is FALSE?

A) If there is a lot of uncertainty, the benefit of waiting is diminished.

B) In the real option context, the dividends correspond to any value from the investment that we give up by waiting.

C) By delaying an investment, we can base our decision on additional information.

D) Given the option to wait, an investment that currently has a negative NPV can have a positive value.

 

 

2) Which of the following statements is FALSE?

A) One way to see why you sometimes choose not to invest in a positive-NPV project is to think about the decision of when to invest as a choice between two mutually exclusive projects: (1) invest today or (2) wait.

B) You invest today only when the NPV of investing today exceeds the value of the option of waiting, which from option pricing theory we know to be always positive.

C) When you do not have the option to wait, it is optimal to invest in any positive-NPV project.

D) When you have the option of deciding when to invest, it is usually optimal to invest only when the NPV is positive but close to zero.

 

3) Which of the following statements is FALSE?

A) Aside from the current NPV of the investment, other factors affect the value of an investment and the decision to wait.

B) The option to wait is most valuable when there is a great deal of uncertainty regarding what the value of the investment will be in the future.

C) The smaller the cost of waiting, the less attractive the option to delay becomes.

D) It is always better to wait to invest unless there is a cost to doing so.

 

4) Which of the following statements is FALSE?

A) An alternative to using the Black-Scholes formula is to compute the value of growth options using risk neutral probabilities.

B) Future growth options are not only important to firm value, but can also be important in the value of an individual project.

C) While the Black-Scholes formula values American options, most growth options cannot be exercised at any time.

D) Out-of-the-money calls are riskier than in-the-money calls, and because most growth options are likely to be out-of-the-money, the growth component of firm value is likely to be riskier than the ongoing assets of the firm.

 

5) The idea that once a manager makes a large investment, he should not abandon the project is known as the:

A) negative NPV fallacy.

B) abandonment fallacy.

C) sunk cost fallacy.

D) dependence fallacy.

 

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