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 of an option is the price at which the underlying asset can be bought or sold. In the context of abandoning a project investing in real assets, the strike price would be the market value of the asset at abandonment, as this is the price at which the asset could be sold. The historical cost of the asset is not relevant, as it is a sunk cost and cannot be recovered. Forgone revenues and interest on bonds may be factors to consider in the decision to abandon the project, but they do not represent the strike price of the option.

The Option to Abandon a Project Investing in Real Assets