The Option to Abandon a Project Investing in Real Assets

question 56

Multiple Choice

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) foregone revenues anticipated from the project.
• D)foregone interest on the bonds used to finance the real assets.

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Definitions:

Days' Sales in Inventory

A financial metric indicating the average number of days a company takes to sell its inventory.

Ending Inventory

The cumulative worth of merchandise ready for sale at the conclusion of a financial period.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including material and labor expenses.

Profit Margin Ratio

A financial metric that measures the percentage of profit a company earns from its total revenue.