The management at Kingswood Motors considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to be easily converted to manufacture other types of large machinery. If their new line of cars is poorly received, their plant should be easy to sell to another manufacturing company. In this example, the price at which they expect to sell the plant if things go poorly resembles:

Question

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The price at which they expect to sell the plant in case of poor reception of their new line of cars resembles the strike price of a put option on the plant. A put option gives the holder the right, but not the obligation, to sell an underlying asset at a specified price (strike price) before a specified date. In this scenario, the management at Kingswood Motors is considering the option to abandon the new manufacturing plant if the new line of cars is not well received, and the price they expect to sell the plant resembles the strike price of a put option.

The Management at Kingswood Motors Considered the Option to Abandon