ExpertEasy2 marksMultiple Choice
ACCA · Question 10 · Investment Appraisal
Section A
DeepEarth Extraction is evaluating a new mining project. The traditional Net Present Value (NPV) is slightly negative. However, the board notes that if mineral prices rise over the next two years, they can scale up operations significantly. If prices fall, they can sell the mining rights to a competitor.
Which types of real options are present in this scenario?
Section A
DeepEarth Extraction is evaluating a new mining project. The traditional Net Present Value (NPV) is slightly negative. However, the board notes that if mineral prices rise over the next two years, they can scale up operations significantly. If prices fall, they can sell the mining rights to a competitor.
Which types of real options are present in this scenario?
Answer options:
A.
Option to delay and option to expand.
B.
Option to expand and option to abandon.
C.
Option to abandon and option to delay.
D.
Option to redeploy and option to delay.
How to approach this question
Match the actions described in the scenario to the definitions of real options (expand, delay, abandon, redeploy).
Full Answer
B.Option to expand and option to abandon.✓ Correct
Real options add value to a project beyond the traditional NPV.
- The ability to 'scale up operations significantly' if conditions are favorable is an 'Option to Expand'.
- The ability to 'sell the mining rights' if conditions are poor is an 'Option to Abandon'.
Common mistakes
Confusing the option to abandon with the option to redeploy.
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