Asked by Ciera Watson on May 05, 2024
Verified
Suppose a firm builds a plant with more space than the firm currently needs. What type of real option best describes the firm's behavior?
A) An abandonment option
B) An expansion option
C) A land option contract
D) A contraction option
Real Option
The flexibility to make decisions on investments, such as the timing of projects or the expansion of operations, based on the evolution of market conditions.
Expansion Option
The opportunity or ability to invest additional capital in a project, based on its successful performance or other factors.
- Become aware of the various real options involved in capital investment and recognize their significance on the valuation of projects.
Verified Answer
JL
JANNO LAMPKINMay 12, 2024
Final Answer :
B
Explanation :
Building a plant with more space than currently needed is an example of an expansion option. This option allows the firm to expand its operations in the future if there is an increase in demand or if the firm wants to diversify its product line.
Learning Objectives
- Become aware of the various real options involved in capital investment and recognize their significance on the valuation of projects.
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