The management at Socrates Motors considered the option to abandon when building their new manufacturing plant. The design of the plant allows it to easily be 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 extra cost of building the plant in such a way that it can easily be converted for other uses resembles

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The extra cost of building the plant in such a way that it can easily be converted for other uses is similar to the premium paid for a put option, which gives the owner the right to sell an asset at a predetermined price in the future. The option to easily sell the plant to another manufacturing company is similar to the put option, as it provides an insurance against losses if the new line of cars is poorly received.

The Management at Socrates Motors Considered the Option to Abandon