CFA Practice Question

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CFA Practice Question

Molecular Sciences has a patent for a promising new chemical product, but it's worried about the size of the market opportunity, and it's unsure whether the manufacturing process will meet government regulations regarding toxic chemicals. If the company does begin an effort to commercialize the product, though, it will have the option to give up the project if demand doesn't materialize or if the environmental liability appears too large. This is an example of:

A. Timing options.
B. Abandonment options.
C. Fundamental options.
Correct Answer: B

The abandonment option increases the value of the project because it reduces the size of the investment at risk.

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