Suppose a Firm Builds a Plant with More Space Than

question 42

Multiple Choice

Suppose a firm builds a plant with more space than the firm currently needs. What type of real option best describes the firm's behavior?

• A)An abandonment option
• B)An expansion option
• C)A land option contract
• D)A contraction option

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Definitions:

Warranty Expense

Costs incurred by a company for repairing, replacing, or refunding products under warranty, considered a contingent liability until incurred.

Unrealized Loss

A loss that results from holding onto an asset that has decreased in price, but has not yet been sold.

Tax Rate

The rate at which the government imposes taxes on the income or earnings of a person or a company.

Deferred Tax Asset

Represents future tax relief for a company, arising from deductible temporary differences, carryforward losses, or credits.