Phased investments,such as a factory that can be built in stages where each stage is contingent on those that precede it and where,at each decision point,management can continue the project by investing additional funds (an exercise price )or abandon it for some estimated value,would best be categorized as:

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Phased investments that involve the ability to continue an investment in stages with the exercise of an option for each stage is best characterized as a follow-on option. This is because the investment decision at each stage depends on the outcome of the previous stage, and management exercises an option to continue the project with each new stage. The option to continue is contingent upon the outcome of the previous stage and the value of the estimated future cash flows, which are re-evaluated at each decision point. Swaps (A) involve the exchange of two assets or financial instruments, whereas a switching option (C) involves the ability to switch from one asset to another. Option theory can be applied in the case of phased investments (D), as long as the investment decision involves the exercise of an option that is contingent upon the outcome of the previous stage.

Phased Investments,such as a Factory That Can Be Built in Stages