The opportunity to abandon a project inexpensively is likely to have more value when the product:
A)Incurs high fixed costs of production
B)Incurs high variable costs of production
C)Is generating a positive NPV
D)Has a steady degree of operating leverage

Question

Quizplus · Accepted Answer

When a project incurs high fixed costs of production, it becomes difficult and expensive to abandon the project if it turns out to be unprofitable. Therefore, having the opportunity to abandon the project inexpensively has more value in such cases. On the other hand, if a project incurs high variable costs of production, the cost of abandoning the project is likely to be lower as variable costs can be reduced or avoided easily by stopping production. Therefore, the opportunity to abandon the project inexpensively may not be as valuable in such cases. The positive NPV or degree of operating leverage of the project do not necessarily affect the value of the opportunity to abandon the project inexpensively.

The Opportunity to Abandon a Project Inexpensively Is Likely to Have