Part D Real Options Analysis 1 question (4 points)

Five years ago, Rednip Ltd purchased a block of land to establish manufacturing operations. They spent $1 million for the 4 acres of land, which was significantly larger than what they needed to conduct operations at the time. In fact they could have gotten away with spending only $700,000 on a smaller parcel of land. Now they are considering building a new factory on the site in response to an increase in demand for their product. It will cost them $200,000 to construct the new buildings on the previously unused part of their land parcel.

6. Answer ALL of the following questions:

a. What style of option has been described? [e.g. Option to abandon]

b. Is the option described in the text above a put option or a call option?

c. What was the price paid for the option?

d. What is the exercise price of the option?