The option to abandon a project investing in real assets can be considered to have an exercise price equal to the:
A) historical cost of the asset.
B) resale 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 exercise price of abandoning a project investing in real assets is the amount that the asset can be sold at, which is the resale value of the asset at abandonment. This represents the salvage value of the asset, and is the cost that can be recovered from abandoning the project. Historical cost (A) is irrelevant as it refers to the initial cost of the asset, while foregone revenues (C) and foregone interest (D) are not related to the salvage value of the asset.

The Option to Abandon a Project Investing in Real Assets