Question 1

What is the value of the project assuming an $80 annual cost and the option of not pursing the project in periods where cash flow is negative?

Accepted Answer

A)   $10.86
B)   $13.81
C)   $33.52
D)   $47.33E) A) and C)
F) A) and D)

Question 2

The price of oil is $45 per barrel. The effective lease rate and risk free rate are 3.0% and 4.0%, respectively. The constant cost of extraction is $25 per barrel and the volatility of prices is 15.0%. If an untapped well costs $240 to open and can produce indefinitely, at what price per barrel should the well be opened?

Accepted Answer

A)   $34
B)   $44
C)   $54
D)   $64E) None of the above
F) All of the above

Question 3

The phrase in real option theory used to replace the strike price?

Accepted Answer

A)   Exercise
B)   Investment
C)   PV of asset
D)   TrendE) None of the above
F) C) and D)

Question 4

If we continue to consider the $80 annual cost, but are able to avoid operating in years where money will be lost, what is the expected risk neutral cash flow in year 2?

Accepted Answer

A)   $2.12
B)   $14.36
C)   $80.00
D)   $82.12E) None of the above
F) A) and D)

Question 5

Use a binomial tree to value to following option. Assume rf = 0.045, rp = 0.14, σ = 0.20, E(CF1)  = $62 million, g = 0.03, time horizon = 2 years, binomial period = 1 year, and cost = $500 million. What is the value of this project option?

Accepted Answer

A)   $47 million
B)   $57 million
C)   $67 million
D)   $77 millionE) None of the above
F) B) and C)

Exam 14: Real Options

Use a binomial tree to value to following option. Assume r_f= 0.045, r_p= 0.14, σ = 0.20, E(CF₁) = $62 million, g = 0.03, time horizon = 2 years, binomial period = 1 year, and cost = $500 million. What is the value of this project option?

Correct Answer
verified

The phrase in real option theory used to replace the strike price?

Correct Answer
verified

If we continue to consider the $80 annual cost, but are able to avoid operating in years where money will be lost, what is the expected risk neutral cash flow in year 2?

Correct Answer
verified

Correct Answer
verified

What is the value of the project assuming an $80 annual cost and the option of not pursing the project in periods where cash flow is negative?

Correct Answer
verified

Exam 14: Real Options

Use a binomial tree to value to following option. Assume rf = 0.045, rp = 0.14, σ = 0.20, E(CF1) = $62 million, g = 0.03, time horizon = 2 years, binomial period = 1 year, and cost = $500 million. What is the value of this project option?

Correct AnswerverifiedShow Answer

The phrase in real option theory used to replace the strike price?

Correct AnswerverifiedShow Answer

If we continue to consider the $80 annual cost, but are able to avoid operating in years where money will be lost, what is the expected risk neutral cash flow in year 2?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the value of the project assuming an $80 annual cost and the option of not pursing the project in periods where cash flow is negative?

Correct AnswerverifiedShow Answer

Use a binomial tree to value to following option. Assume r_f= 0.045, r_p= 0.14, σ = 0.20, E(CF₁) = $62 million, g = 0.03, time horizon = 2 years, binomial period = 1 year, and cost = $500 million. What is the value of this project option?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified