Red Mile is considering taking a 30-year project which requires an initial inves

Question

Red Mile is considering taking a 30-year project which requires an initial investment of $ 20 million in an real estate partnership to develop track side condos with a Louisville based real estate management company. This project has a present value of expected cash ows of $ 19 million. While the net present value is negative, assume that Red Mile has the option to abandon this project anytime by selling its share back to the developer (which will turn it into student housing) in the next 3 years for $ 10 million. This scenario is best described as... Option to delay /Option to expand/Option to abandon/ Call option? explain it.

Explanation / Answer

Call option

because its the call of red choice whether they want to pursue the project or not. they can abandon it any time

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