Firms continue to operate in unfavorable environments ______.
A) because the time value of the abandonment option is zero
B) to avoid the sunk costs of abandoning investment
C) when there is a chance that prospects will improve
D) Three of the above
E) Two of the above

Question

Quizplus · Accepted Answer

Firms continue to operate in unfavorable environments to avoid the sunk costs of abandoning investment and when there is a chance that prospects will improve. The time value of the abandonment option is not zero as it refers to the potential future value of abandoning an investment, not the current value. Therefore, two of the above (B and C) are the best choices.

Firms Continue to Operate in Unfavorable Environments ______