The option to abandon a project investing in real assets can be considered to have a strike price equal to the:
A) historical cost of the asset.
B) market value of the asset at abandonment.
C) foregone revenues anticipated from the project.
D)foregone interest on the bonds used to finance the real assets.

Question

Quizplus · Accepted Answer

The strike price for abandoning a project investing in real assets is the market value of the asset at abandonment. This is because abandoning the project means selling the assets in the market and the market value would be the value at which it can be sold. Historical cost is irrelevant because it does not reflect the current market conditions. Foregone revenues anticipated from the project or foregone interest on the bonds used to finance the real assets are also irrelevant because they do not reflect the actual value of the assets in the market.

The Option to Abandon a Project Investing in Real Assets