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Consider the following statement about real options: Certain real options allow companies to change capacity output in response to changing market conditions. True or False: The preceding statement is correct. True False Which type of real option allows a firm shut down a project if its cash flows are lower than expected? Expansion option Timing option Flexibility option Abandonment Option Consider the following example: King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working for the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows-which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York City. The company will pursue the additional contracts with the cities in New Jersey and Long Island in the future if it thinks that the additional contracts justify investing in more snowplows, King Snowplows began operations in New York City two years ago. As an independent contractor, the company does the majority of its business working the city. The company also had offers from surrounding cities in New Jersey and Long Island, but these offers would have required the company to invest in additional snowplows-which have high up-front costs. King Snowplows decided to purchase only the snowplows necessary to handle its contract with New York City. The company will pursue the additional contracts with the cities in New Jersey and Long Island in the future if it thinks that the additional contracts justify investing in more snowplows. This example describes a real option to

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