Question 1

**Section A**

MetroWater PLC, a public utility company, is evaluating a massive infrastructure project to build a new desalination plant. The project has a marginal negative Net Present Value (NPV). However, the board notes that building the plant gives them the exclusive right to expand into neighboring regions in five years if water demand surges.

In the context of investment appraisal, what type of real option does this represent?

Accepted Answer

Identify the nature of the future choice created by the initial investment. The ability to grow the project later is an expansion option.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Confusing the option to expand with the option to delay. Delaying means not starting now; expanding means starting now to do more later.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 4

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