Question

Why must real options have positive​ value? ​(Select all the choices that​ apply.) A. Real options must have positive value because they can always be sold to recover the initial investment. B. Real options must have positive value because they are only exercised when doing so would increase the value of the investment. C. Having the real option but not the obligation to act is valuable. D. If exercising the real option would reduce​ value, managers can allow the option to go unexercised.

Answer 1

Answer:

B. Real options must have positive value because they are only exercised when doing so would increase the value of the investment.

C. Having the real option but not the obligation to act is valuable.

D. If exercising the real option would reduce​ value, managers can allow the option to go unexercised.

Explanation:

A real option is a choice made available to the managers of a company concerning business investment opportunities. It is referred to as “real” because it typically references projects involving a tangible asset instead of a financial instrument. Tangible assets are physical assets such as machinery, land, and buildings, as well as inventory.

A 'real option' is also a choice available to a company regarding an investment opportunity. The term 'real' means that it refers to a tangible asset and not a financial instrument. Examples of real options include determining whether to build a new factory, change the machinery and technology on a production line.