Rick Buys a 1966 Mustang for $3,000,planning to Restore and Sell

question 57

Multiple Choice

Rick buys a 1966 Mustang for $3,000,planning to restore and sell the car.He goes on to spend $9,000 restoring the car.At this point he can sell the car for $10,000.As an alternative,he can spend an additional $3,000 replacing the engine.With a new engine the car would sell for $13,000.Rick should

• A)complete the repairs and sell the car for $13,000.
• B)sell the car now for $10,000.
• C)never try such an expensive project again.
• D)be indifferent between (i)selling the car now and (ii)replacing the engine and then selling it.

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Definitions:

Exercise Price

The price at which an option holder can buy (call option) or sell (put option) the underlying asset or security.

Call Options

Call options are financial contracts that give the buyer the right, but not the obligation, to buy a specified amount of an underlying asset, at a set price, within a specified period.

Put Options

Financial contracts giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time frame.

Stock Price

The current price at which a share of a company is bought or sold on the stock market.