If a firm has the option to abandon a project during its life, this amounts to a ______ option on the remaining cash flows associated with the project.

A. call
B. put

Correct Answer: B

Abandonment options, which are the right to sell the cash flows over the remainder of the project's life for some salvage value, are like American put options. When the present value of the remaining cash flows falls below the liquidation value, the asset may be sold. Abandonment is effectively the exercising of a put option.