Real options analysis is an investment analysis tool that looks at an investment or activity as a series of sequential steps, and for each step, the investors have the option of: 1) investing additional funds to grow or accelerate, 2) delaying, shrinking the scale of, or abandoning an activity. However, analyzing and making decisions on these options is often easier said than done. Which of the following illustrates the potential pitfalls of real option analysis? The managers involved with the analysis lose their ability to objectively assess the options due to an inflated sense of their ability to reduce risks inherent in the decision-making process. Due to a lack of subjectivity when formally modeling a real option, managers may have an incentive to choose variance values that diminish the likelihood of project approval. A prevailing tendency on the part of managers to operate in a highly conservative manner thereby resulting in the investment approval criteria not being met. A prevailing mindset on the part of management to place greater focus on smaller decisions than on larger ones.
Real options analysis is an investment analysis tool that looks at an investment or activity as a series of sequential steps, and for each step, the investors have the option of: 1) investing additional funds to grow or accelerate, 2) delaying, shrinking the scale of, or abandoning an activity. However, analyzing and making decisions on these options is often easier said than done. Which of the following illustrates the potential pitfalls of real option analysis? The managers involved with the analysis lose their ability to objectively assess the options due to an inflated sense of their ability to reduce risks inherent in the decision-making process. Due to a lack of subjectivity when formally modeling a real option, managers may have an incentive to choose variance values that diminish the likelihood of project approval. A prevailing tendency on the part of managers to operate in a highly conservative manner thereby resulting in the investment approval criteria not being met. A prevailing mindset on the part of management to place greater focus on smaller decisions than on larger ones.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Real options analysis is an investment analysis tool that looks at an investment or
activity as a series of sequential steps, and for each step, the investors have the
option of: 1) investing additional funds to grow or accelerate, 2) delaying, shrinking
the scale of, or abandoning an activity. However, analyzing and making decisions on
these options is often easier said than done. Which of the following illustrates the
potential pitfalls of real option analysis?
The managers involved with the analysis lose their ability to objectively assess
the options due to an inflated sense of their ability to reduce risks inherent in
the decision-making process.
Due to a lack of subjectivity when formally modeling a real option, managers
may have an incentive to choose variance values that diminish the likelihood of
project approval.
A prevailing tendency on the part of managers to operate in a highly
conservative manner thereby resulting in the investment approval criteria not
being met.
A prevailing mindset on the part of management to place greater focus on
smaller decisions than on larger ones.
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