Question

2. When would a real option to invest in a project be out-of-the-money? Explain whether you should discard the project in that case

Answer 1

Ans = A project is out of money when the project's Net Present Value = 0 or less than 0.  

NPV is the method that determines the present value of all cash inflow is greater or lesser the amount of initial    cash outflow. It show's the current profit that investor earns on a project by considering investor rate of return.

NPV formula = Present value of cash inflow - initial investment.

The more the NPV value the higher will be profit hence the project will be in the money. A project with higher NPV value should be undertaken.

we would discard that project which is out of money, it will not earn economic profit rather than it will be loss for the investor as cash outflow would be more than cash inflow.