Suppose That the Cost of a Real Option Is $1

Multiple Choice

Suppose that the cost of a real option is $1 million, and that using the real option will improve the expected NPV of a project by $900,000. How should management react to the use of this real option?

A) Since the real option costs more than it generates in NPV, it should not be considered for implementation.
B) If the real option provides more flexibility in how management reacts to various project outcomes, it should at least be considered for implementation.
C) Management should study whether or not the use of this real option will reduce the risk of the project. They will have to weigh the $100,000 potential loss against the reduced risk.
D) Both b. and c. are correct.