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)Forgone revenues anticipated from the project
D)Forgone 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 equal to the market value of the asset at abandonment, as this represents the value that could be recovered if the project is abandoned. The historical cost of the asset, forgone revenues, and forgone interest on bonds are not relevant for determining the strike price.

The Option to Abandon a Project Investing in Real Assets