CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
A company is evaluating a plant expansion. Management can delay the investment by one year if market demand proves weak. This flexibility is best described as a:
The flexibility to delay the investment is a timing option. It lets management wait for more information before committing capital. Sizing options involve changing the scale of a project, while fundamental options arise when the project's value depends directly on an underlying price.
- Atiming optionCorrect
- Bsizing option
- Cfundamental option
Explanation
The right to postpone an investment until conditions become clearer is a timing option. A sizing option concerns expanding or abandoning scale, and a fundamental option is one where the project's payoff itself depends on an underlying variable such as a commodity price.
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