Valuing an Option to Expand Includes

question 13

Multiple Choice

Valuing an option to expand includes

• A)the added value that will be received from the expended production that will result in the expansion.
• B)the net cost of the expansion.
• C)treating the expansion as a separate project and determining a NPV for the new project.
• D)only the additional profit that the firm will receive as a result of increased production.

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Definitions:

Profit Per Unit

The amount of profit earned by selling one unit of a product or service.

Natural Monopoly

A market condition where a single supplier is most efficient in producing a good or service due to high initial costs and substantial economies of scale.

Marginal Cost

The augmentation in cumulative costs linked with generating an extra unit of a product or service.

Average Cost

The overall expense of manufacturing split by the quantity of units made.