Assume That Kinston Has the Ability to Ignore the Pilot

question 21

Essay

Assume that Kinston has the ability to ignore the pilot production and test marketing and to go ahead and build their manufacturing plant immediately and that the probability of high or low demand would still be 50%.What is the value of the the option to do pilot production and test marketing?

---

Definitions:

Capitalised

Expenses or costs that are added to the cost basis of a fixed asset on a company's balance sheet, rather than being expensed immediately.

Extrusion System

A process used in manufacturing to create objects of a fixed cross-sectional profile by pushing material through a die of the desired cross-section.

Financial Year

A one-year period that companies use for accounting purposes and preparation of financial statements, which may or may not align with the calendar year.

Expensed

Costs or expenditures that are immediately charged against earnings in the period in which they are incurred, rather than being capitalized or deferred.